Jennings, Strouss & Salmon, PLC: Publications

Legal Watch Series: Topic 3 - Destruction is Not an Evil Term

Introduction: This is the third article in a series of short informational pieces relating to one of the hottest topics in litigation over the past five years - electronic discovery. The purpose of these articles is to provide your business entity with some guidelines on how to most efficiently organize to deal with electronic discovery. The articles will continue to be emailed regularly over the next few months. If you are new to our distribution, or if you would like to view previous articles in this series relating to ESI, visit our website.

Common sense tells us that an organization should not be required to keep all of its records (paper or electronic) forever. Fewer records kept means less overall cost and greater efficiency in searching and retrieving records. However, cost and efficiency are not the only relevant considerations in deciding what to keep and for how long, and there are often tensions between the various considerations. This article will discuss some of the relevant legal and business considerations for keeping or destroying records.

According to ISO (International Organization for Standardization) 15489, a "record" is defined as information created, received and maintained as evidence by an organization or person in the transaction of business or in the pursuance of legal obligations, regardless of media. A record includes information holding operational, legal, fiscal, vital or historical value. (See Resource #1)

Information and records are valuable strategic assets, storing information representing a wealth of institutional knowledge. Any document retention program should reflect the businesses' judgment of the value of its information and records. See Pub. Citizen v. John Carlin, 184 F. 3d 900, 910-11 (D.C. Cir. 1999) (Finding it appropriate under federal statute to allow agencies to maintain record-keeping systems in the form most appropriate to the business or the agency, reflecting the administrative, legal, research and other values.)

Common sense should also tell us that there is no generic information and records management policy appropriate for every entity. The value of information will vary greatly from organization to organization, and even within an organization. The retention of records in various divisions of the business might be different. There is no one size fits all policy and procedure. To be effective, the retention procedure must accommodate the different needs of the affected group.

A reasonable records retention policy takes industry practices and business judgment into consideration. It should never be forgotten that an organization's information records primarily exist to permit the organization to do business. The organization's need for information should be a significant factor in structuring its retention program. While some documents contain information which is deemed irreplaceable and must be indefinitely retained (archived), information and records that do not have such continuing value to the organization can be destroyed when the organization, in its business judgment, determines it is no longer needed. (See Resource #2)

Courts recognize that records destruction is a necessary, every day event. Federal Rule of Civil Procedure Rule 37 (f) provides a "safe harbor" for businesses that implement and utilize good faith policies and procedures for destruction of documents. Good faith usually exists where the policy and procedure is conducted in the regular course of business and where the policy and procedure is based on rational considerations of cost and benefit, whether the plan was applied consistently and whether there is a provision for the suspension of the plan when necessary.

In deciding what records to retain, the business should keep in mind who might be seeking the production of documents and in what situations. The more common requests for production of documents are by the government as part of its regulatory function or via civil or criminal investigation, an adversary in the litigation context, a third party subpoena, or (less likely) a Freedom of Information Act (FOIA) request.

In developing its record retention practies, the business should conduct thorough research into laws, rules and regulations that set out document retention requirements. Different categories of documents will have different retention periods; but, the default retention period for public records is permanent. Such research is best done by a lawyer, who is familiar with the industry and the specific business. However, there are a number of "off-the-shelf software packages" that, when combined with regular updates, can identify relevant retention statutes and regulations. Once the legal requirements have been ascertained, it is important that they be applied consistently. Inconsistency in the application of the procedures may create the impression of ulterior motive and imply improper conduct. (See Resource #3)

It is very important that the organization maintain its records relating to the development of the records retention program. This documentation should include copies of the training material and resources, as well as any documents reflecting changes to the policy or implementation of its provisions. Without such evidence, it may be difficult to establish that the policy is anything more than an ad hoc reaction to a particular situation, in which case the protections afforded good faith policies would be lost.

Most businesses have routine legal record keeping requirements that exist as a matter of course and that are not dictated by unique situations, such as litigation. Illustrative examples of these types of requirements are listed below. Of course, the illustrations are by no means complete. (A Google search of the term "records retention" resulted in 5.8 million hits.) As noted earlier, companies need to do or have their lawyer do an exhaustive search of legal sources to determine what requirements apply to them. For purposes of this article, some of these example requirements include:

Accounting Needs/Audits/Taxation

Sections 802 and 1102 of the Sarbanes-Oxley Act of 2002 (criminal penalties for destroying or concealing documents)
The Securities and Exchange Commission has issued rules relating to the Retention of Records Relevant to Audits and Reviews, 17 CFR Part 21

State and Federal Regulatory Needs

HIPPA - Health Insurance Portability and Accountability Act of 1996
The investment industry is under a requirement to maintain for a specified period (3 or 6 years depending on the circumstances) all communications with certain investment customers.

State and Federal Statutory Needs

The USA Patriot Act contains numerous document retention requirements.
Every state has some form of document retention regime, driven in varying measure by the state's corporation, tax, employment, environmental and other laws and regulations.

Personnel Records

Instead of requiring the retention of records, The Federal Fair and Accurate Credit Transaction Act requires a business to destroy personal information of former employees and consumers before it is discarded.
Personnel records normally should not be stored on company computers because of privacy concerns.

International Companies

Companies that do business in foreign countries have even more unique needs, for example, The Charter of Fundamental Rights of the European Union.

The Opinion of the United States Supreme Court in the Andersen Consulting case, Arthur Andersen v. United States, 544 U.S. 696, 704, 708 (2005), makes it clear that document destruction in the normal course of business is acceptable. The Court noted that document retention policies, which are created in part to keep certain information from getting into the hands of others, including the Government, are common in business. The Court also noted that it is not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances. "A knowingly corrupt persuader cannot be someone who persuades others to shred documents under a document retention policy when he does not have in contemplation any particular official proceeding in which those documents might be material." 544 U.S. at 708.

Thus, if a document destruction policy and procedure was developed in good faith and not for the purpose of destroying evidence relevant to litigation or investigation, it will be upheld. If a business has reason to anticipate that a claim might be made by a third party or an investigation might be conducted, it is obligated to suspend its document retention procedures, at least to the extent that it impacts the claims, i.e. it needs to make sure that relevant documents are not destroyed. This is called a "litigation hold", a topic that will be explored in our next discussion.

Even in situations where an organization is required to put a "litigation hold" on documents related to a specific case or specific issues, it is allowed to continue to implement its good faith document retention policy, i.e. document destruction, with respect to documents outside the litigation hold.

In conclusion, document destruction is not evil. Destruction is an acceptable stage in the information life cycle. An organization may destroy information when there is no continuing value or need to retain it. When a business adheres to a rational document retention policy in good faith and destroys documents without knowledge of the reasonable possibility of a claim, there will be no sanctions for following the policy. The development of a document retention policy often requires the services of legal counsel. (See Resource #4)

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In the next Legal Watch Series: Preparing for E-Discovery newsletter, we will explore the important topic of litigation holds. Stay tuned!

About the Author
For more information or questions regarding E-Discovery and the Rules for Electronically Stored Information Management, contact Michael R. Palumbo.

Michael R. Palumbo focuses his practice on commercial and real estate litigation. Particular areas of experience include banking (UCC Articles 3 & 4) litigation; title insurance, escrow agent and Deed of Trust litigation; and quiet title, adverse possession, homeowners' associations and real estate agent disputes. He has participated in more than 50 trials in the Superior Courts of Arizona and District Court of Arizona, in most of which he was lead counsel. Mr. Palumbo can be reached at 602.262.5931 or mpalumbo@jsslaw.com.

Resources Used for This Legal Watch

Grenig, et. al, Electronic Discovery and Records Management Guide, §5: 2, p. 146, 2009 edition
Grenig, et. al, Electronic Discovery and Records Management Guide, §4: 1, p. 101, 2009 edition
Carlucci v. Piper Aircraft Corp., 102 F.R.D. 472, 485 (S.D. Fla. 1984)
Federal Rule of Civil Procedure 37 (f) - "safe harbor" provision

How Secure is Your Intellectual Property? Maintaining Your Ownership Rights

On a daily basis, IDEA members enlist talented employees and third-party contractors to contribute their experience and expertise to projects that enhance the district energy industry. These employees and contractors may be charged with innovating technology and implementing or improving valuable business practices. Often, by performing these tasks, these employees and contractors create or improve valuable intellectual property. This intellectual property - whether manifesting in a patent, copyright, trademark or trade secret - likely translates into economic value that contributes to an IDEA member's company or other business entity (Organization). Organizations are well-served to closely monitor the creation of intellectual property by employees and contractors within the Organization and take affirmative steps to best maintain ownership rights to efficiently preserve the economic value of their intellectual property.

Forms of Intellectual Property
Intellectual property that an employee or contractor may create for an Organization could manifest in different forms. For example, an employee or contractor may create intellectual property by developing copyrightable content, conceiving patentable inventions, expanding valuable trade secret information or creating source-identifying trademarks.

A patent offers protection for a new and useful "invention," such as processes or methods, machines, articles of manufacture, compositions of matter, or new or useful improvements of the same. To be eligible for a patent, the invention must fit into the above patentable subject matter, and must also be useful, novel and non-obvious in relation to existing inventions. A patent, which can only be issued in the United States by the U.S. Patent and Trademark Office, grants the inventor the right to exclude others from making, using, offering for sale or selling the invention. Patent-protected inventions are valuable corporate assets because they protect an Organization's core technology.

A copyright offers protection for various types of "works," including literary works, software programs, pictorial and graphic works, audio visual works, architectural works and works of compilation. In the United States, a copyright protects an "original work of authorship fixed in a tangible medium of expression." A copyright holder enjoys the exclusive right to control (among other rights) the copying, reproduction, distribution and publication of the work and the creation of derivative works. It's important to remember that a copyright protects only the exact expression in the work - not the general idea or concept of the work. Copyright-protected works are also valuable corporate assets because they may be used to protect an Organization's core technology, such as software applications, as well as an Organization's creative works, for instance, advertising and promotional materials.

A trademark is a word, name, symbol, sound or phrase used on goods or in association with services to indicate the source or origin of those goods or services. A registered trademark prevents others from using the same or confusingly similar marks for similar goods or services, allowing an Organization to control the quality and reputation associated with its products and services in the marketplace. Organizations are well-served to select distinctive trademarks to better identify their goods or services and also to file applications for federal registration of these marks.

Trade secrets are confidential information, techniques, practices or know-how that are proprietary to an Organization or of commercial value to it, because they are generally not known or available to the public. An Organization must take reasonable steps to maintain and protect the confidential nature of its trade secrets. Otherwise, they may fall into the public domain and lose their competitive value.

Update: Extension and Expansion of Rules for NOL Carrybacks

As we reported in our September tax client alert, under the American Recovery and Reinvestment Act (ARRA) enacted in February, many small businesses that had expenses exceeding their income for 2008 could choose to carry the resulting loss back for up to five years, instead of the usual two. Under the ARRA, this option was available for an eligible small business (ESB) that had no more than an average of $15 million in gross receipts over a three-year period ending with the tax year of the net operating loss (NOL). Pursuant to the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA) enacted last month, this carryback option is no longer limited to ESBs. Additionally, the WHBAA extended the carryback option to include NOLs that arise in tax years beginning in 2009. Thus, businesses averaging gross receipts in excess of $15 million can now take advantage of these carryback rules and will have an option of carrying back losses for any one tax year beginning before January 1, 2010 and ending after December 31, 2007.

As under the ARRA, the election to carryback NOLs can generally only be made for one tax year. Thus, for a calendar year taxpayer, the business can elect to carryback 2008 or 2009 losses, but not both. However, an ESB that made or makes an election under the rules of the ARRA may make the election for two tax years instead of one. An ESB that has losses in both 2008 and 2009 could potentially carryback the 2008 losses under the ARRA rules and the 2009 losses under the WHBAA rules.

The WHBAA does limit the amount of the NOL that can be carried back to the 5th tax year before the loss year to 50% of the business's taxable income for that year. This limitation is not applicable to a 2008 NOL of an ESB that makes an election under the ARRA. Additionally, the WHBAA includes a separate, similar set of NOL carryback rules for life insurance companies.

Businesses that have large losses in 2008 and/or 2009 should consult with their tax advisors regarding these carryback rules as they may be able to offset income earned in up to five prior tax years and be eligible for a refund.

Each case a business or individual may face is unique and may require legal advice. If these changes apply to you, or you have other tax related questions, please contact either Nancy C. Pohl or Richard C. Smith

About the Authors
Nancy C. Pohl is an Associate attorney practicing in the Estate Planning and Probate, Tax and Corporate Securities and Finance Departments. Her practice focuses on corporate and partnership tax planning, estate planning, tax-exempt organizations, general business planning and federal and state tax litigation. She also regularly advises clients on estate planning and probate matters. Contact Ms. Pohl at npohl@jsslaw.com or 602.262.5927.

Richard C. Smith is a Member of the Tax, Estate Planning & Probate Departments and represents clients in all aspects of tax, corporate and business planning. His practice has a particular emphasis in the employee benefits area including the design, implementation and other aspects of pension, profit sharing and other qualified plans. He also advises clients in estate planning matters, including estate plans, wills, trust and family partnership agreements. Contact Mr. Smith at rsmith@jsslaw.com or 602.262.5972.

Upcoming Changes Regarding Roth IRA Rollovers/Conversions

After 2009, you will be able to roll over amounts from qualified employer sponsored retirement plans, such as 401(k)s and profit sharing plans, and regular IRAs, into Roth IRAs, regardless of your adjusted gross income (AGI). Currently, individuals with more than $100,000 of adjusted gross income as specially modified are barred from making such rollovers.

What's so attractive about a Roth IRA? In summary:

Earnings within the account are tax-sheltered (as they are with a regular qualified employer plan or IRA).
Unlike a regular qualified employer plan or IRA, withdrawals from a Roth IRA are not taxed if some relatively liberal conditions are satisfied.
A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 1/2 as is generally the case with regular qualified employer plans or IRAs. (For 2009, there's a moratorium on RMDs.)
Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings (as with a regular qualified employer plan or IRA) and tax-free withdrawals (unlike with a regular qualified employer plan or IRA). They do, however, have to commence regular withdrawals from a Roth IRA after the account owner dies.

The cost is that the rollover will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that was not taxed to an employee when contributed to the qualified employer sponsored retirement plan) and the earnings on those pre-tax dollars. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you'll owe $28,000 of federal tax. So you'll be paying tax now for the future privilege of tax-free withdrawals, and freedom from the RMD rules.

Should you consider making the rollover to a Roth IRA? The answer may be "yes" if:

You can pay the tax hit on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you'll have less money building up tax-free within the account.
You anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.
You have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.
You intend to convert an existing IRA account in which you have assets with substantially reduced values that you expect to substantially increase in the future.
You are willing to pay a tax price now for the opportunity to pass on a source of tax-free income to your beneficiaries.

You also should know that Roth rollovers made in 2010 represent a novel tax deferral opportunity and a novel choice. If you make a rollover to a Roth IRA in 2010, the tax that you will owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.

Why would you choose to pay a tax bill in 2010 instead of deferring it to 2011 and 2012. Absent Congressional action, after 2010 the tax brackets above the 15% bracket will revert to the higher pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%. The Administration has proposed to increase taxes only for those making $250,000, but it is difficult to predict who will be hit by higher rates. In addition, there are health reform proposals before Congress right now that would help finance healthcare reform with a surtax on higher-income individuals. So if you believe there's a strong chance your tax rates will go up after 2010, you may want to consider paying the tax on the Roth rollover in 2010.

Here are some ways individuals can prepare now for next year's rollover opportunity.

Non-high-income individuals who are able to make deductible IRA contributions this year should do so. They'll reduce their 2009 tax bill and, if they make the conversion to Roth IRA next year, they won't have to pay back the tax savings until 2011 and 2012.
Individuals who have never opened a traditional IRA because they weren't able to make deductible contributions (and who never rolled over pre-tax dollars to a regular IRA) should consider opening such an IRA this year and making the biggest allowable nondeductible contribution they can afford. If they convert the traditional IRA to a Roth IRA next year they will have to include in gross income only that part of the amount converted that is attributable to income earned after the IRA was opened, presumably a small amount. In 2010 and later years, they could continue to make nondeductible contributions to a traditional IRA and then roll the contributed amount over into a Roth IRA. However, note that if an individual previously made deductible IRA contributions, or rolled over qualified plan funds to an IRA, complex rules determine the taxable amount.
Some high-income individuals may plan to make large conversions in 2010 but to opt out of the deferral of tax until 2011 and 2012 because they fear they will be in a higher tax bracket in those years than in 2010. These individuals should avoid the standard year-end-planning wisdom of accelerating deductions and deferring income but should do the reverse in an effort to avoid being pushed into the highest brackets by a large IRA-to-Roth-IRA conversion in 2010. These individuals should be considering ways to defer deductions to 2010, and accelerate income from next year into 2009.

Each case a business or individual may face is unique and may require legal advice. If these changes apply to you, or you have other tax related questions, please contact Richard C. Smith.

Richard C. Smith is a Member of the Tax, Estate Planning & Probate Departments and represents clients in all aspects of tax, corporate and business planning. His practice has a particular emphasis in the employee benefits area including the design, implementation and other aspects of pension, profit sharing and other qualified plans. He also advises clients in estate planning matters, including estate plans, wills, trust and family partnership agreements. Contact Mr. Smith at rsmith@jsslaw.com or 602.262.5972.

Legal Watch Series: Topic 2 - Preparing for E-Discovery

Introduction: This is the second article in a series of short informational pieces relating to one of the hottest topics in litigation over the past five years - electronic discovery. The purpose of this series is to provide your business entity with some guidelines on how to most efficiently organize itself to deal with electronic discovery. These articles will continue to be emailed regularly over the next few months. If you are new to our distribution, or if you would like to view previous articles in this series relating to ESI, visit our website.

As noted in our first article of this series, we assume that you have already developed good faith policies and procedures for the preservation/retention/destruction of documents and Electronically Stored Information (ESI) in the regular course of business. This is largely a function of whether the policy is based on rational considerations of cost and benefit, whether the plan was applied consistently and whether there is a provision for the suspension of the plan when necessary. If you have done so, you will benefit from the "Safe Harbor" provisions of the Federal Rules of Civil Procedure, see Federal Rule 37(f) (no sanctions for destruction of ESI in good faith).

Having previously developed a document retention policy, and in anticipation of that day when your company almost assuredly will face a request for documents from the government, an adversary or a third-party, your ESI discovery team must focus on the following issues and plan for them.

What documents do we have?
Identify the scope, breadth, and depth of ESI that may be sought during discovery, taking potential claims and defenses into consideration.

What should be retained?
Reducing the amount of ESI that is retained will save cost of e-discovery. Limit the volume of information; save only important business records, documents required by law, regulatory records, and documents relevant to potential litigation. Personal records and communications should not be stored on company computers.

Where is it?
After determining the scope of ESI there must be an analysis of where the content resides in the organization's system. If organizations are not certain where ESI resides, the litigation hold will be too expansive resulting in extra disruption and costs. If you know where it is, you can find it more easily. This is often referred to as an "ESI Map."

How do we preserve it?
First, take control of the key players' media used in creating or keeping ESI, eg. phones, PDA's, laptops, etc. These "key players" are the ones who control the records. Second, suspend the document destruction procedures. This second step is also known as a litigation hold - the duty to preserve documents when litigation is reasonably anticipated, usually before the service of a lawsuit. We will be addressing litigation holds in a separate, upcoming article.

How do we find it and gather it?
Determine the best document collection strategy for your business. Are you going to gather the information in-house or use an outside vendor? Will you use software programs or perform manual searches? If you use software, will you use off-the-shelf programs or custom software?

After we find it, what form should we save it in?
The best way to preserve ESI is to first collect, then copy the media. There are numerous methods available to copy media, as referenced in the section above. Consult with your IT advisors to determine what software is best for your operation.

How do we review it?
Processing includes reviewing and analyzing the ESI. Tasks associated with processing include determination of duplicate information, relevance and privilege review and evaluation of ESI for more efficient use. This is often the most expensive part of electronic discovery. It can be helpful to convert ESI to a form that allows a more effective and efficient review. There are software programs that are designed to assist the process, but they are often very expensive.

How do we produce it?
Determine the best format for producing the ESI. Following are the four formats most commonly used:

Native format: the format in which the file was created
Quasi-native format: for example extracting part of a data base and loading it into another data base to produce a final format
Quasi-paper: converting ESI into TIFF or PDF format
Paper

The need for pre-planning between counsel and client.
In order to fulfill legal obligations to ensure that all sources of potentially relevant client information are identified and preserved, counsel must become fully familiar with the client's document retention policies, as well as the client's data retention architecture.

Ultimately counsel, whether in-house or outside, must respond to the courts regarding the adequacy of ESI discovery. If counsel is not properly informed, or if inventories and records policies have not been properly prepared, counsel will be limited in their effectiveness. This involves risk both for the lawyer and the business client. Thus, a business litigant cannot avoid legal counsel involvement. The critical variable is timing - when should legal counsel be brought in to the discussion? Hopefully, the answer is obvious - sooner rather than later.

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In the next Legal Watch Series: Preparing for E-Discovery newsletter, we will explore and discuss the parameters of accessibility. Accessibility is a key concept in the e-discovery landscape because ESI that in inaccessible due to burden and cost is presumed not to be discoverable. Stay tuned!

About the Author
For more information or questions regarding E-Discovery and the Rules for Electronically Stored Information Management, contact Michael R. Palumbo.

Michael R. Palumbo focuses his practice on commercial and real estate litigation. Particular areas of experience include banking (UCC Articles 3 & 4) litigation; title insurance, escrow agent and Deed of Trust litigation; and quiet title, adverse possession, homeowners' associations and real estate agent disputes. He has participated in more than 50 trials in the Superior Courts of Arizona and District Court of Arizona, in most of which he was lead counsel. Mr. Palumbo can be reached at 602.262.5931 or mpalumbo@jsslaw.com.

Resources Used for This Legal Watch

Stio and Quigley, Getting a Grip on the Litigation Hold, e-discovery, ABA Section on Litigation, 2007, p.20
Zublake v. UBS Warburg, 229 F.R.D. 422 (S.D.N.Y.)(Zublake V)

Employment Client Alert: Changes to the Genetic Information Nondiscrimination Act

Summary: This Client Alert will provide an overview of the Genetic Information Nondiscrimination Act of 2008 (GINA), including examples of what is considered genetic information, and what changes were recently put into effect. Employers will learn how these changes affect their business and what actions they should to take to ensure that they are complying with the recent changes. Employees will learn how their genetic information is protected by GINA.

The most notable new anti-discrimination law in twenty years, the Genetic Information Nondiscrimination Act of 2008 (GINA), went into effect for health insurers in May of this year, and for employers on November 21, 2009. GINA protects Americans from being treated unfairly by health insurers and employers because of differences in their DNA that may affect their health.

GINA prohibits employers and health insurers, with some exceptions, from asking employees to provide their family medical histories. Also, insurers cannot require such testing or use genetic information to deny coverage or set premiums or deductibles. These recent changes also prohibit any employment decisions being made based on an employee's genetics. Health plans will also be prohibited from rewarding their members for giving family medical histories when completing health risk questionnaires.

What is Genetic Information?
Genetic information does not include information about a person's current health status. However, genetic information does include:

A person's genetic tests;
Genetic tests of family members;
The manifestation of a disease or disorder in a family member;
Participation of a person or family member in research that includes genetic testing, counseling or education.

What Will GINA Do?
GINA was enacted to enable individuals to take advantage of genetic testing that may reduce the chance of contracting certain disorders, without suffering any adverse employment or insurance related consequences. Some of these developments include tests for breast or colon cancer mutations, classifications of genetic properties of existing tumors to help determine a course of treatment, tests for Huntington's disease, as well as carrier screenings for fragile X syndrome, spinal muscular atrophy, and cystic fibrosis. GINA's purpose is to ensure that anyone who requests a genetic test for cancer will not be charged a higher rate for health insurance due to the presence of a positive genetic predictor for cancer, nor will their employment status be adversely affected by this type of health decision. The law also enables people to take part in research studies without fear that their DNA information might be used against them in health insurance or the workplace.

The bill may have only a small effect on what we do today, but its impact may grow with advances in biotechnology. It is comprehensive, requiring amendments to portions of the Title VII of the Civil Rights Act, the Employee Retirement Income Security Act (ERISA), the Health Insurance Portability and Accountability Act (HIPAA), the Internal Revenue Code, the Public Health Service Act and Title XVIII of the Social Security Act (Medicare). It is intended to be a federal baseline for discrimination, and does not preempt stricter state laws that may already be in effect.

What Won't GINA Do?
Although fairly broad in reach, GINA does not:

Prohibit the use of genetic information to make payment determinations, such as reimbursement for additional testing covered for those participants at a higher risk of a disease or disorder;
Prohibit health care providers from recommending genetic tests to their patients;
Mandate coverage for particular tests or treatments;
Affect underwriting based on current health status;
Prohibit certain types of research by insurers or employers.

What Actions Should Employers Take?
Employers should immediately post the mandatory "EEO is the Law" poster supplement next to their current version of the "EEO Is the Law" poster. A copy of the poster supplement may be obtained at the EEOC website.

We also recommend employers update their policies, handbooks and training to reflect these new changes. We are available to assist you with these updates and can provide additional counsel on the effects these rules may have on your business practices.

About the Authors
Valerie J. Walker is an Associate attorney focusing her practice on litigation, and labor and employment. She has previously worked as a law clerk for both the Cook County Public Defender and the National Labor Relations Board in New York City. For more detailed information regarding these changes, please contact Valerie Walker at vwalker@jsslaw.com or 602.262.5844.

John J. Egbert is Chair of the firm's Labor & Employment Department. Mr. Egbert's practice focuses in the areas of discrimination, wrongful discharge, and wage and hour litigation. He represents both private and public clients in federal and state court litigation, as well as before the various administrative agencies. He frequently advises clients on employment policies and procedures and represents employers in labor arbitration. Mr. Egbert also practices extensively before the state and federal appellate courts. Contact John Egbert at jegbert@jsslaw.com or 602.262.5994.

Legal Watch Series: Topic 1 - The Need for and Preparation of Your E-Discovery Team

This is the first in a series of short informational pieces relating to one of the hottest topics in litigation over the past five years - electronic discovery. The purpose of these articles is to provide your business entity with some guidelines on how to most efficiently deal with electronic discovery. The articles will be emailed regularly over the next few months.

The Need for an ESI-Discovery Team

Records management programs are fundamental tools in addressing the creation, retention and disposition of records, including Electronically Stored Information (ESI). This article assumes that your business has adopted such a program. If it has not done so, a program should be implemented immediately.

Computerized data have become commonplace in litigation. The sheer volume of such data, when compared with conventional paper documentation, can be staggering. Large corporate computer networks create backup data measured in terabytes, or 1,000,000 megabytes; each terabyte represents the equivalent of 500 billion typewritten pages of plain text. Digital or electronic information can be stored in any of the following: mainframe computers, network servers, personal computers, hand-held devices, automobiles, or household appliances; or it can be accessible via the Internet, from private networks, or from third parties. Any litigation discovery plan must address issues relating to such information, including its location, preservation, retrieval, inspection, form of production and use at trial.

There is a very strong chance that your business will be called on to respond to a request for production of ESI. Such production requests can emanate from governmental investigations, litigation in which the company is a party or subpoenas from third-party litigation. Before ESI can be produced, it must be found (hopefully cost effectively).

Preparation is the key to an effective and efficient response to ESI discovery and organization is the key to preparation. If your business takes the initiative to form an ESI discovery response team before you are faced with a subpoena or a request for production of documents, you will reap significant benefits in reduced costs and reduced disruptions to your operations.

Who Should Be Part of the Team? Manager and Coaches

Developing and implementing an effective ESI response program is a task that requires a team of professionals who fully understand the organization and the types of records created by the organization. ESI discovery involves aspects of administration, legal, technological (IT) and records retention procedures and policies. Thus, any complete ESI discovery team must include people from each of these areas in order to make sure there is an informed understanding of the intersection between corporate information systems and the prevailing legal requirements. Some businesses have found it preferable to use outside consultants to develop an ESI Response Program rather than to develop it in-house. Although there are e-discovery services designed to help companies with electronic record keeping, any such program should include consultation with outside litigation counsel.

Senior Management/Operations - This person will represent the business side of the discussion. For example, someone must address the budget considerations and cost analysis of whatever program is established. Another important consideration will be the impact on operations and productivity of the ESI discovery plan. There are many other business concerns that would be clear to this person, but not necessarily to others.

Representative of the General Counsel's Office or Outside Counsel - This person will bring knowledge of the legal considerations to the group. Things such as "litigation holds," spoliation of evidence, and privilege issues must be understood and addressed when formulating the plan. This cannot be properly done without a lawyer.

Representative of the Information Technology Department - It should be obvious that a person who is familiar with the types of ESI the organization creates and receives, knows where the ESI is stored and how to locate it, and understands the technological capabilities of the organization, needs to be part of the team that develops an ESI Response Program.

Representative of the Records Department - This person implements and monitors the policies and procedures, trains employees and assists in complying with document preservation and destruction. All of these functions are implicated in records discovery. This person's knowledge will be particularly important in adopting and carrying out "litigation holds", i.e. suspension of the destruction of records that are relevant to potential litigation.

Electronic Discovery Director - Some very large corporations, such as Pfizer, have established the position of Electronic Discovery Director; however, it is only in the biggest businesses that are continuously involved in litigation where such a person would be cost effective.

Perhaps the most important consideration in forming the team is the determination of the leader of the group - the "spokesperson." In all likelihood, the "spokesperson" will be called on to explain the company's ESI-Discovery policies and procedures in some forum - either in a litigation discovery deposition or in a court hearing - relating to the adequacy of the company's actions. Since it is never a good idea to have a company lawyer be a witness in any legal proceeding, the person should come from one of the other departments. Obviously, the person selected should possess the qualities of a good witness: well-spoken, composed, professional, presentable, etc.

______________________________________________

In the next Legal Watch: Preparing for E-Discovery newsletter, we will walk you through developing your ESI Response Program, highlighting what questions need to be asked.

Resource Used for This Legal Watch
- Manual for Complex Litigation § 11.446, Discover of Computerized Data, (4th Ed. 2004)

For more information or questions regarding E-Discovery and the Rules for Electronically Stored Information Management, contact Michael R. Palumbo at 602.262.5931 or mpalumbo@jsslaw.com.

U.S.-Mexico Cross Border M&A Transactions

Overview
As the economic relationship between the United States and Mexico has continued to grow and mature, our two countries' economies have become increasingly integrated. Nowhere is this more evident than in the number of companies operating on both sides of the border and in the increased economic cooperation between U.S. and Mexican companies and entrepreneurs. This cooperation may take many forms, from simply investing in previously existing companies, to forming new joint ventures, to merging with or acquiring a target company on the other side of the border. While many of the economic and legal fundamentals inherent in such transactions remain the same whether the transaction is domestic or international in nature, there are nonetheless unique issues and concerns that must be addressed in cross border transactions.

Transactions with Mexican Partners:

Setting Up the Deal
A successful business venture involving parties from both sides of the border requires serious forethought on both the legal and business fronts. The parties must consider the assets each brings to the table, the best way to optimize those assets and the best way to limit or mitigate any risk factors. In a merger or joint venture, the partners must decide such basics as who will have day-to-day management or decision-making authority to bind the company; which decisions require unanimous or super-majority consent due to their importance; under what circumstances a party may exit the joint venture, selling their interest to a third party; under what circumstances a party may be forced out of the business through a buy-out provision; what happens when the parties become deadlocked on decisions of vital importance to the business; what happens when the business requires additional capital and one party is not willing or able to make a new capital contribution, etc.

Going through the exercise of asking these questions and working out agreeable solutions will ultimately result in a document to memorialize the relationship of the parties. In the United States, this would typically take the form of a shareholders or similar agreement. However, it is important to note that the use of such documents in the Mexican context should be approached with caution, as certain typical provisions may run afoul of Mexican law and be unenforceable. For this reason, it is vital that the parties avoid the wholesale transfer of U.S. style documents to the Mexican arena. While U.S. parties may feel more comfortable with their standard documents and legal structure, these must be reviewed by attorneys licensed to practice Mexican law in order to ensure their enforceability. Many of the goals set out under U.S.-style documents must be structured differently in the Mexican system in order to ensure enforceability. For example, due to a general prohibition under Mexican law, shareholders are not permitted to agree beforehand how they will vote their shares. This would undermine the enforceability of many provisions under the typical U.S shareholders' agreement. However, in Mexico, if properly structured as part of the articles of incorporation and bylaws, many of the same goals and objectives may be achieved.

Acquisition of Shares or Assets
In the case of an acquisition, whether it be of shares or assets, the necessary due diligence will be much the same as with a domestic transaction. There will, however, be certain key differences to be aware of. First and foremost will be the legal and regulatory framework within which the business operates and within which the assets are held. Mexico has unique rules regarding the participation of foreign ownership in certain industries. Notable examples include: the petroleum and electricity generating industries, which are generally limited to government participation; land passenger transportation services and radio and television transmission (except cable television), which are reserved for Mexicans; the domestic airline industry, which allows a maximum 25% foreign participation; and the insurance industry, which allows a maximum 49% foreign participation, just to name a few. In addition, foreign participation may require government notification and, in certain circumstances, approval.

Other differences to be aware of include the threshold and approval process for certain transactions that are subject to anti-trust scrutiny, as well as restrictions involving foreign ownership of real property located in the coastal and border regions. In addition, many other practices vary. Notable examples include: i) regulatory oversight and environmental controls and restrictions, which vary significantly from their U.S. counterparts; ii) the role of the notary public in Mexico's civil law system. The Mexican notary public is a lawyer empowered by the state to vest the documents he or she "notarizes" with presumed authenticity, truth and enforceability. He is also charged with the correct calculation and payment of taxes generated by these transactions; iii) the role, duty and standards of professionals such lawyers, accountants and brokers, which are not regulated to the same extent as their U.S. counterparts; iv) the use of escrow arrangements for facilitating transaction closing and post-closing matters, which is not commonly used in Mexico; and iv) the extent and use of insurance, such as title insurance, which is not as extensively used in Mexico as in the United States.

Specific Business Considerations
There are a number of situations peculiar to doing business in Mexico. Following is a brief description of some of the most relevant:

Restrictions on Foreign Investment
Briefly discussed above, depending upon the type of business to be engaged in, there may be restrictions either limiting the amount of foreign capital permitted to participate in a certain venture, or barring foreign capital altogether.

Labor
The low wages prevalent in Mexico have been a motivating factor in much foreign direct investment. Nonetheless, investors should be aware that Mexico's labor law system is much more employee oriented than its U.S. counterpart. Employment in Mexico is not generally considered "at will." This means that employees may only be fired for those causes specifically enumerated in the federal labor law statute, or by payment of a statutorily calculated severance payment. In addition, there are a number of other differences from the U.S. system, including mandatory profit sharing, annual holiday and seniority bonuses, minimum vacation and rest days, and more. There are, however, mechanisms commonly used to manage the risk inherent in some of these items. For example, exposure to profit sharing is commonly mitigated through the use of "service companies" that provide the employees to the income-generating entity. These must be carefully structured, however, in order to be deemed sufficiently independent and therefore legitimate. Similarly, "friendly" unions are often employed to provide a buffer against assaults by more aggressive unions.

Form of Entity
Mexican law provides for a number of types of entities, some of which match up better than others with particular U.S. investors' needs. The most common type of Mexican business entity is the sociedad anónima de capital variable or S.A. de C.V. This is most similar to the U.S. corporate form. Another type of entity often preferred by U.S. investors is the sociedad de responsabilidad limitada de capital variable or S. de R.L. de C.V., which is most comparable to a U.S. limited liability company, or LLC and is given "flow through" tax treatment for U.S. income tax purposes. In addition, Mexican law provides for a number of other types of entities, most of which are used only rarely.

Taxes
The most important taxes in Mexico include the federal income tax (impuesto sobre la renta), the value added tax (impuesto al valor agregado), the single rate business tax (impuesto empresarial a tasa única), and state taxes including the real estate tax (predial) and the real property transfer tax (impuesto sobre adquisición de bienes inmuebles). While the overall tax burden is comparable to that generally prevailing in the United States, U.S. investors doing business in Mexico will require expert tax advice from the outset in order to choose the most appropriate type of Mexican business entity for their particular U.S. tax situation, and make adequate use of the provisions of the U.S.-Mexico tax treaty in order to avoid being subjected to "double taxation."

Conclusion
Cross border mergers and acquisitions transactions between the United States and Mexico now occur on a regular basis. Given the differences that exist between the legal systems and business customs between the two countries it is essential that U.S. parties to such transactions avoid the temptation to transfer wholesale the documents and structures they may have become used to in the domestic arena. It is highly advisable to rely on counsel licensed to practice in Mexico to advise on the proper Mexican documents and structures necessary to achieve the parties' objectives.

Mr. Herrera is a member (partner) with the law firm of Jennings, Strouss & Salmon where he practices corporate law with an emphasis on Mexico-related mergers, acquisitions, joint ventures and resort development. Mr. Herrera is licensed in both Mexico and the U.S.

2009 Year End Tax Planning Strategies

As the end of the year approaches, it is a good time to think of methods that can help lower your tax bill this year and possibly next. Factors that compound the challenge include the stock market's swoon (and partial recovery), the difficult economic climate we are in right now, and the strong possibility that there will be tax changes in the works over the next few years.

The indisputably good news we are certain of is that Congress has once again acted to "patch" the alternative minimum tax ("AMT") problem for 2009; has provided other AMT relief, has reinstated and/or expanded a number of tax breaks (such as the tax deduction for state sales and excise taxes paid on the purchase of new cars, including light trucks, SUV's, motorcycles and motor homes; an enhanced tax credit for higher education expenses; and a 65% subsidy for COBRA premiums for up to nine months. For 2009, businesses continue to enjoy tax breaks such as a beefed-up expensing option under Code Sec. 179; a 50% bonus first-year depreciation writeoff for most new machinery, equipment and software placed into service this year; deferral on debt discharge income from reacquisitions of debt; reduced capital gains for holders of qualified small business stock; and shortened S corporation built-in gains holding period. Certain favorable employee benefit changes were also enacted in the current year legislation known as the American Recovery and Reinvestment Act of 2009 ("ARRA").

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Increase the amount you set aside for next year in your employer's health flexible spending account ("FSA") if you set aside too little for this year. Do not forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
If you become eligible to make health savings account ("HSA") contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2009.
Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
Postpone income until 2010 and accelerate deductions into 2009 to lower your 2009 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2009 that are phased out over varying levels of adjusted gross income ("AGI"). These include IRA and Roth IRS contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2009. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year, or if the tax rates for next year are increased.
Many observers expect that the top tax rates for high income taxpayers will increase in 2010 and beyond. You may wish to consider accelerating income (particularly long term capital gains that have been reported on the installment sale method) into 2009 in order to take advantage of the current rates.
If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into Roth IRA's if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2009. On a related note, effective January 1, 2010, even taxpayers with higher income are eligible for establishing of, or conversion to, Roth IRAs.
It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2010.
If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.
Consider using a credit card to prepay expenses that can generate deductions for this year.
If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2009.
Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding prior to year-end.
You may be able to save taxes this year and next by applying a bunching strategy to "miscellaneous" itemized deductions, medical expenses and other itemized deductions.
Estimate the effect of any year-end planning moves on the AMT for 2009, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. This includes the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.
If you are thinking of making energy saving improvements to your home, such as putting in extra insulation or installing energy saving windows, a credit of up to $500 may be available for such improvements if made this year.
Substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home. The credit will be larger this year than last for expenses over $6,667.
If you are thinking of buying a hybrid vehicle eligible for a tax credit, check to see if it is eligible for the credit, and, if so, purchase it before year-end.
You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
Businesses should consider making expenditures that qualify for the up to $250,000 business property expensing option (under IRC §179) for assets bought and placed in service this year; the maximum expensing amount will drop to $25,000 for assets bought and placed in service next year (higher expensing amounts apply to certain specialized assets), and the expensing option is phased out if property placed in service during the year exceeds a ceiling which is $800,000 for 2009. Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally will not be available next year (some exceptions apply, such as for businesses affected by Presidentially declared disasters).
You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
If you are self-employed and have not done so yet, set up a self-employed retirement plan.
You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $13,000 in 2009 to an unlimited number of individuals but you cannot carry over unused exclusions from one year to the next.
If you are thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.
If you are age 70½ or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift before year-end, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer can achieve important tax savings.
If you are receiving Social Security benefits, there are a number of steps you can take to reduce or eliminate tax on your benefits.
Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2009 miscellaneous itemized deductions subject to the 2%-of-AGI floor.
Depending on your particular situation, you may also want to consider triggering a debt-cancellation event in 2009, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.
If you have losses from businesses that might otherwise be suspended under the passive loss rules, consider increasing the time that you devote to such business to satisfy the minimum hourly requirements for classification as an active business, thus freeing up such loss deductions.
Consider taking advantage (or assisting a younger generation family member in taking advantage) of the first time homeowners tax credit, in the amount of 10% of purchase price of the residence, not to exceed $8,000 if purchased prior to December 1, 2009.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

2009 Year-End Tax Planning: Tax-Saving Strategies for the Real Estate Professional

As the end of the year approaches, real estate professionals should undertake tax planning designed to reduce their income tax liabilities for year 2009 and future years. Below is a non-exhaustive checklist of tax-saving moves that may be available. Most of the strategies are premised upon the time-honored principles of deferral of income into future years and acceleration of deductions into the current year.

High-income earners, however, should take into account that many observers expect the top federal tax rates will increase in future years, thus making the deferral of taxable income less appealing. Even long-term capital gains rates may jump up. Accordingly, it may be beneficial to recognize profits or gains this year at the comparatively lesser rates.

Maximize deductions. Consider extending your subscriptions to professional journals, paying professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2009 miscellaneous itemized deductions subject to the 2%-of-AGI floor. Consider using a credit card to prepay expenses that can generate deductions for this year.

You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year. You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
Postpone income until 2010 and accelerate deductions into 2009 to lower your 2009 tax bill. This strategy may enable you to claim larger deductions, credits and other tax breaks for 2009 that are phased out over varying levels of adjusted gross income ("AGI"). These include IRA and Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher-education tax credits, the above-the-line deduction for higher-education expenses and deductions for student loan interest.

Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2009. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year, or if the tax rates for next year are increased. This strategy may backfire, however, as previously discussed.
Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. Meet with a tax advisor to discuss year-end trades you should consider making.
Plan for your future. If you are self-employed and have not done so yet, set up a self-employed retirement plan.
Consider converting a traditional IRA to a Roth IRA. If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into Roth IRAs, if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2009. On a related note, effective January 1, 2010, even taxpayers with higher income are eligible for establishment of, or conversion to, Roth IRAs.
Evaluate increasing your tax withholdings. If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2009. Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding prior to year-end.
Estimate the effect of any year-end planning moves on the Alternative Minimum Tax (AMT) for 2009. Keep in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. This includes the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.
Think green. If you are thinking of making energy saving improvements to your home, such as putting in extra insulation or installing energy saving windows, a credit of up to $500 may be available for such improvements if made this year. In addition, substantial tax credits are available for installing energy-generating equipment (such as solar electric panels or solar hot water heaters) to your home. The credit will be larger this year than last for expenses over $6,667. If you are thinking of buying a hybrid vehicle eligible for a tax credit, check to see if it is eligible for the credit, and, if so, purchase it before year-end.
Manage business losses. If you have losses from businesses that might otherwise be suspended under the passive loss rules, consider increasing the time that you devote to such business to satisfy the minimum hourly requirements for classification as an active business, thus freeing up such loss deductions. If you own an interest in a partnership, a limited liability company or an S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.
Businesses should consider making expenditures that qualify for the up to $250,000 business property expensing option (under IRC §179) for assets bought and placed in service this year. The maximum expensing amount will drop to $25,000 for assets bought and placed in service next year (higher expensing amounts apply to certain specialized assets), and the expensing option is phased out if property placed in service during the year exceeds a ceiling which is $800,000 for 2009. Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally will not be available next year (some exceptions apply, such as for businesses affected by Presidentially declared disasters).
Give wisely. You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $13,000 in 2009 to an unlimited number of individuals, but you cannot carry over unused exclusions from one year to the next. If you are thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.
First-time homebuyer tax credit. Consider taking advantage (or assisting a younger generation family member in taking advantage) of the tax credit, in the amount of 10% of purchase price of the residence, not to exceed $8,000 if purchased prior to December 1, 2009.
Take advantage of health flexible spending accounts (FSA) or health savings accounts (HSA) if you have access to them. Increase the amount you set aside for next year in an employer's FSA if you set aside too little for this year. Do not forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids. If you become eligible to make HSA contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2009.

Substantial tax savings may result by implication of the identified strategies to the extent applicable to particular circumstances of the real estate professional. Consultation with tax advisors is, of course, an imperative aspect of the planning process.

Bankruptcy As The New Beginning

The economic downturn is taking its toll on businesses of every size. The very thought of bankruptcy is viewed by business owners and management as somewhat of a defeat. There is bound to be a national restructuring, where previously viable industries and business models will vanish and be replaced by new ideas and new structures. That is where bankruptcy enters the picture. It offers the opportunity for resurgence. Businesses can use bankruptcy as a means to an end; a business tool to capitalize on a new beginning.

Overview
Filing a bankruptcy proceeding often invokes a fear of the unknown. Having a working knowledge of bankruptcy concepts is key to preserving remnants of an old business or providing a fresh start for a new one. Bankruptcy can be a way a business which is not necessarily in financial distress can purchase assets, effectuate a merger or obtain financing if it is available. In the case of small businesses, owners may be tied to the obligations of the business through personal guarantees or the use of personal credit. Having a comprehensive bankruptcy plan is the essence of emerging with personal finances in tact.

There are essentially two types of bankruptcies available for a business: Chapter 7 and Chapter 11. Chapter 7 is a straight liquidation. A trustee is immediately appointed randomly from a panel of individuals who have met the Bankruptcy Code qualifications to serve in that capacity. The trustee takes control of the debtor's assets, sells them and distributes the proceeds to creditors. The trustee can operate the debtor's business during the liquidation process. Trustees have full access to the debtor's books and records. The benefit to a Chapter 7 is that there is an immediate finality.

Chapter 11 is typically a reorganization case. As in a Chapter 7, all assets become property of the "Estate," but in a Chapter 11, there is no trustee and the debtor remains in possession of the assets. In fact, the debtor is referred to as the "debtor-in-possession" or "DIP." Businesses typically continue to operate in a Chapter 11 with the goal of restructure debt or otherwise re-order their financial or corporate structure. Although generally referred to as a reorganization, a DIP can liquidate its assets in a Chapter 11 proceeding and may want to do so believing that the DIP can achieve a higher value than could a Chapter 7 trustee. This process may ultimately benefit an owner who also has personal obligations for the business debt.

Bankruptcy as an Ally-Why Be a Debtor
The most common use of the Chapter 11 bankruptcy process is one designed to restructure the company's balance sheet. A company that wants to extend or refinance onerous debt, eliminate burdensome contracts or leases, and/or bring in new capital can generally accomplish these goals by a Chapter 11 filing which provides these opportunities and a temporary safe haven.

But, Chapter 11 is not just for severely financially distressed entities. There are a myriad of other business reasons for filing a bankruptcy. Bankruptcy may be a good alternative for a business that owns some troubled properties and other healthy ones. Structuring a "roll up" and then using the bankruptcy process to propose a long-term solution can provide the necessary and ultimate protection for the distressed properties. Other common business transactions such as sales, mergers and acquisitions may be accomplished in a more beneficial fashion for all parties under the protective umbrella of Chapter 11.

For example, with Bankruptcy Court approval, the Chapter 11 debtor can sell its assets during the course of the bankruptcy or through a plan of reorganization. The debtor only has to show that the sale is an exercise of its best business judgment and will benefit creditors. More importantly, the sale can occur "free and clear of liens and other interests." The liens attach to the proceeds, which the debtor disburses appropriately. That may permit a purchaser to acquire the assets without having to delve into disputes with creditors and with little or no risk of successor liability. Plus, a final sale order from the Bankruptcy Court is virtually impossible to overturn. All bankruptcy sales are subject to higher and better bids. However, the initial bidder which is outbid may be able to obtain reimbursement for amounts spent in due diligence, a so-called a "break-up fee."

Similarly, investments of capital, post-bankruptcy extensions of credit, and mergers can be accomplished free of many of the risks attendant with these transactions outside of bankruptcy. Because the bankruptcy process involves extensive noticing procedures and disclosure, some federal and state restrictions applicable outside of bankruptcy may not be imposed in bankruptcy.

Many lenders dealing with financially troubled companies insist on a bankruptcy filing before they will refinance. The bankruptcy gives the lender the opportunity to solidify its lien position or possibly even improve it. A lender is not obligated to continue funding a loan post-petition and thus, a debtor may want to obtain financing. This financing may be on an unsecured or secured basis but it requires Bankruptcy Court approval.

Bankruptcy Realities
Cases change. Parties change. But, there seems to be a certain set of realities which exists in every bankruptcy case. Bankruptcy is fluid. Unlike usual commercial dealings or litigation in which the facts are established, a bankruptcy proceeding is constantly changing. One day the debtor may be seeking to reorganize and the next trying to liquidate a number of its assets.

The Bankruptcy Court is a court with broad jurisdiction. The Court can and will exercise jurisdiction over just about any entity and any matter that relates to the debtor in any fashion.

The Bankruptcy Court is a court of equity. That matters to a business person because it means the results are unpredictable. The Bankruptcy Code is designed to strike a balance between debtor and creditor interests. Nevertheless, as a court of equity, the Bankruptcy Court can wield enormous power in fashioning relief as it sees fit. And, every judge has his or her own unique theory for dealing with the numerous debtor/creditor issues that arise. The caveat is to keep expectations within reason and be prepared to change position or strategy on a moment's notice.

Bankruptcy events (e.g., sales and motions) are always an emergency. Not every issue that arises in a bankruptcy proceeding is presented as an emergency, but almost. In a typical Chapter 11, while the debtor may have had weeks to prepare an issue, it will file a motion to be heard on an expedited basis and creditors may be given literally hours to respond.

Debtors will almost always be given one bite of the apple. Most judges will follow the unwritten rule that debtors should have at least one opportunity to restructure. But, a debtor that abuses the system will be in trouble. It behooves a debtor to get it right the first time; it behooves a creditor to be patient. Cash is king. From either side of the aisle, cash wins at the end of the day. From a debtor's perspective, available cash is critical to get through the administrative expenses associated with the Chapter 11, and to weather the period of time when cash may not be available from a pre- or post-petition lending source. From a creditor' s perspective, a quick resolution of its claim is usually advisable inasmuch as cash is available early on in the case and everyone is optimistic that the debtor will survive. That may not be the situation down the road.

What Bankruptcy Cannot Do

Save money initially. Chapter 11 is an expensive process in terms of professional fees, disbursements to the United States Trustee's Office, and uncompensated time for management to spend on bankruptcy matters.
Allow the debtor to hide out. Chapter 11 is often referred to as a fish bowl. The financial reporting requirements are extensive and creditors are given carte blanche ability to explore the debtor's books and records.
Restructure a company that has no business. Bankruptcy cannot substitute for the lack of viability. There needs to be a core business to reorganize.
Force creditors or customers to continue doing business with the company. Trade vendors, which supply on an open account, can require COD payments and are not required to extend credit terms. Customers without a contractual obligation to purchase from the debtor can simply quit the relationship.

What Bankruptcy Can Do

Provide at least a short respite from paying creditors. The automatic stay brings all collection efforts and lawsuits to an immediate halt.
Provide an opportunity to alter debt repayment terms.
End troublesome contracts or leases. The debtor has a relatively unfettered ability to reject contracts or leases which it no longer believes are in its best interest.
Allow a business owner to work with creditors for an overall solution and to preserve personal finances.

No one can predict when the economy will improve or how different businesses will be impacted during the recovery. Phoenix has been through multiple cycles and it always seems to weather the storm. Clearly, bankruptcy can be a useful tool from the perspective of an owner, investor or purchaser. Bankruptcy no longer represents financial disaster--the once-feared "B" word really stands for a positive part of business.

The Right Path? Understanding Technology Consortia and Their Importance to Your Business

Consider the following scenario: Late one afternoon you receive a frantic call from one of your company's engineers. He or she wants to join a new technology consortium to allow your company to align its R&D efforts with what appears to be an emerging industry standard. The problem is the engineer needs your approval "right away" to allow the company to become a member of the consortium because it's having a critical technology meeting tomorrow.

The engineer e-mails you a copy of the consortium's membership agreement, which looks fairly straightforward, so you authorize your company's participation as a new member. Unknowingly, you may have just compromised some of your company's most lucrative proprietary technology.

Defining Consortia
Technology consortia are generally defined as collaborative efforts among companies and other key players (such as research institutions) in a particular industry that collectively try to address and solve key technology or research challenges.

Some technology consortia, for example, are formed to create "standards" that facilitate greater compatibility among the various technologies in that space, so that the industry can collectively develop increasingly innovative products. Other consortia may be formed to address research roadblocks, which are challenging an entire industry sector. In many of these situations, the consortium members-who are often fierce competitors-are voluntarily coming together to collaboratively solve significant obstacles that are holding back the next generation of research and development. Many sectors of the technology industry have seen a rapid growth in the number of technology consortia, including the hardware, software, semiconductor, wireless, and life sciences industries.

How a particular consortium functions and the specifics of its membership can have a profound effect on your company's business and your intellectual property rights. So, before you join any consortium, you should always take a closer look at the business and legal ramifications of your participation.

Benefits of Participation
Though technology consortia are often promoted by major technology companies, membership can benefit small to midsize companies and even research institutions because such participation can give you a "voice" in the R&D that might impact your industry for years to come. However, every company needs to evaluate the specific pros and cons of participating-or not participating-in any particular consortium.

Some potential benefits of participating in a consortium include increased market acceptance of your technology, the ability to help create new technologies that would not exist absent broad industry collaboration, and the ability to spread substantial research and development costs across multiple consortium members.

There are, however, potential pitfalls to joining a particular consortium-or the wrong consortium-which could prove to be detrimental to your business. Generally, these pitfalls fall into two categories: business and legal risks.

Business Risks
If your company joins a consortium that promotes a "losing" technology or standard, there is a possibility that your company's market share will decline, perhaps precipitously. Trying to play "catch up" with your own R&D (if catching up is even possible) could be prohibitively expensive. Eventually, your existing technology or products could approach obsolescence as competing technologies or standards evolve in a different technological direction.

To avoid the negative implications of not joining the "right" consortium, it is critical to evaluate competing consortia and then analyze which collaborative initiative has the potential of winning the broadest industry acceptance. It's also imperative that you make sure that a particular consortium's purpose aligns with your company's overall business plans and direction.

Moreover, it is important to examine the organizational structure of each consortium. These factors could determine the extent and nature of your company's participation in the consortium's governance and the obligations imposed on you as a member.

Legal Risks
One of the most significant legal risks posed by joining a consortium is your company could inadvertently relinquish some of its most crucial intellectual-property rights. Membership agreements increasingly require each consortium member to comply with all of the consortium's "policies and procedures." This commitment, when fully evaluated, could mean your company is obligated to: disclose confidential patents and other intellectual property to the other members of the consortium (at a minimum); license certain company patents and other intellectual property, sometimes royalty-free, to other consortium members; and share, or even transfer, ownership of your company's technology if you contributed it to the collaborative efforts of the consortium. Thus, it is essential for a company to carefully review all consortium agreements and policies to fully evaluate how membership might impact your company's valuable intellectual property rights.

Maneuver Carefully
Technology consortia are already an essential part of R&D in many companies. Companies that are often competitors increasingly are turning to consortia to collaboratively address technology and research challenges impacting that industry sector. While consortia membership could catapult your company toward greater industry- wide success, the decision to join a consortium is fraught with complexity and should not be undertaken lightly. Evaluation of each consortium should be part of your larger business plan. As with every other piece of your company's business roadmap, maneuver the path with caution and make sure you fully understanding every avenue you pursue.

We've Got Trouble: Financial Trouble in Construction City

The national business media has turned its attention to what is characterized as the "second wave" of delinquencies occurring in the commercial sector - a term meant to include retail, office, industrial and other commercial projects. The condition is so severe that the analysts have characterized failing commercial mortgages as capable of "wiping out" what is left of the financial sector. That is a very serious prediction.

They note that more than $2 trillion in commercial mortgages will mature before the end of 2013, and the market forces that battered the housing market will do the same to commercial properties. Furthermore, it's noted that a substantial number of commercial loans are in default. The riskiest component of the equation is construction loans.

According to some commentators, construction loans are held disproportionately by smaller banks and most vulnerable to failure. With proformas that justified the loans evaporating (no real tenants), the lender is faced with adding to its inventories of homes, empty shells of completed commercial buildings and skeletons of buildings under construction. Some commentators state that the downward spiral will continue till it comes full circle to when the federal government stepped in with TARP and other rescue programs, to counteract the housing crisis. These commentaries are braced with huge numbers to support the scenario, but like all the figures floating out there - they are too large to put in perspective, let alone comprehend.

The question this poses is obvious: What do these predictions mean for Phoenix? At this point, a good bet is that as bad as the commercial market is in Phoenix, it's unlikely that it will drag financial institutions into collapse. There's no doubt that there are too many vacant houses, too few jobs and flat personal income, with an inevitable effect on commercial properties - particularly retail and office. Vacant homes and stressed consumers simply mean no business - and no business means no occupancy - and the dominoes all fall, with the financial institutions left as the last ones to topple.

But Phoenix is a large market, with pockets of some - if not strong - activity. It's also resilient and a target for cash investors waiting on the sidelines. In fact, there appears to be enough cash that, if freed, could salvage enough of the market to keep it alive - perhaps on resuscitation, but not dead. There's evidence of this already moving into the Valley.

There's no doubt that lenders are beginning to realistically assess their inventory of loans - those that are salvageable and those are not. Many lenders are concurrently following two tracks, with the hope that the negotiations will succeed:

working out negotiations
aggressively pursuing foreclosure

Another phenomenon that may account for some measure of optimism is that the risk appears to be distributed among a large number of banks, both in and out-of-state. The failure of one project here does not signify a collapse of an institution.

In short, there are those who predict a doomsday brought on by the collapse of commercial loans dragging the lenders down with it, and include some impressive numbers to support their viewpoint. However, for those executives that may not like what they see - it should not send them ducking under the desk. An optimist at heart would see there is still water in the glass - regardless of whether it is half full or empty - and share some measure of confidence that we will still be around when the commercial market turns.

Mortgages Ltd.: Bankruptcy's Perfect Storm

"Perfect Storm"n. 1. a critical or disastrous situation created by a powerful concurrence of factor (Merriam-Webster Dictionary) 2. the simultaneous occurrence of weather events which, taken individually, would be far less powerful than the storm resulting of their chance combination (Wikipedia).

In late 2007 and early 2008, the country was suffering from a credit crisis and a severe downturn in the real estate market. As a result, Phoenix lender Mortgages Ltd. ("ML") might not have made the front page amidst the myriad of foreclosures, bank closings, and bankruptcies. ML had been in the "hard money" lending business for over 45 years and had typically provided its investors with high rates of return, even in economic down times. The company had weathered many Phoenix real estate declines. But, this time there was a remarkable confluence of events. On June 2, 2008, Scott Coles, ML's principal committed suicide. Because of Coles' years-long authoritarian management style, the company was left completely rudderless. It soon became apparent that ML had lent millions of dollars on some of the most speculative real estate projects in metro-Phoenix, which in good times might have survived, but in bad times were doomed. The real estate crash was going to be worse than anyone anticipated. Home foreclosures were at an all time high, Fannie Mae and Freddie Mac were in financial chaos, and investor capital was non-existent. As matters unraveled, it became clear that frightened investors had stopped investing in ML and ML had stopped funding loans to which it had committed. Borrowers seized on the situation and stopped paying, sued ML on all sorts of lender liability theories, and for the most part, the payments to 2800 investors who had funded all of the ML loans literally evaporated. A real estate crash, hard money, a company without leadership-indeed the perfect storm.

The Bankruptcy Case
On June 23, 2008 one of the largest ML borrowers ($120 million) who was in default filed an involuntary petition against ML. Another defaulted large borrower ($109 million) had already filed suit against ML claiming its loan had been underfunded. Even though ML believed these were litigation tactics to deflect collection actions, the entire ML financial condition seemed to justify consent to relief. What followed was a tsunami. In the one year from commencement of the case to the effective date of the confirmed plan of reorganization, 6 related Chapter 11 and 17 state court cases were filed. Historically speaking, it was one of the largest Chapter 11 bankruptcies filed in the State of Arizona, involving a $1 billion loan portfolio, 2,800 investors, 61 borrowers, 3 Court-appointed committees, one unofficial committee of large investors, and approximately 91 mechanic lien holders on multiple different properties. The related Chapter 11 cases and state court cases involved over $500 million in assets. And, to add to the complexity, administrative proceedings involving three regulatory governmental agencies were initiated or maintained, and the probate of the Coles estate was commenced.

ML's Business
The business structure for ML worked essentially as follows. ML made short term loans secured by real estate, including multifamily residential projects, office building and undeveloped mixed-use projects in Arizona. The loans were evidenced by a promissory note and deed of trust on the real estate. Money for the loans was raised mainly from investors who received a fractional interest in the note and deed of trust. The deeds of trust had as many as 90 beneficiaries. Through various agency agreements, investors granted ML the authority to act on their behalf with respect to the loans. ML was paid a servicing fee in addition to receiving what was known as the "spread," the difference between the interest paid by the borrower and the interest paid to the investor. The structure became a driving issue in the case. As borrowers stopped paying and consequently, there was no money to pay investors, investors began to challenge the agency agreements, ML's authority to deal with the troubled loans and its ability to retain any servicing or spread monies. In addition, it became troubling as to how the investor's interests should be treated. Since they owned the notes and deeds of trust, which would mean the notes and deeds of trust were not property of the estate, did the investors really have a claim against the estate?

The Cast of Characters
ML was anything but the usual Chapter 11 with standard "first day" motions, cash collateral and dip financing issues. By the second week of the case, motions to appoint a trustee had been filed and scheduled for trial, post-Coles management had been fired, and ML's counsel Greenberg Traurig as well as financial advisors MCA Financial had been ousted. For the next month, the company was literally "weaving and bobbing" until new counsel could be hired, dip financing could be obtained, a CEO could be put in place and the trustee motions could be quieted. In the meantime, borrowers continued to capitalize on the events and only 6 of the 66 loans were paying.

The Official Committee of Investors (the "OIC")
Immediately after the case was filed, a group of investors formed an unofficial committee to protect their interests. They hired counsel who began participating in the case and subsequently convinced the United States Trustee to make the committee official. This was an unusual committee in that it had inherent conflicts. Unlike unsecured creditors whose interests are generally aligned, the investors had interests in different notes. Treatment of one borrower and set of investors under one note was not always advantageous to other investors. Nevertheless, the authority was never challenged and the OIC eventually confirmed a plan calling for investors to be invited to transfer their interests to individual limited liability companies governing each note.

Radical Bunny, LLC
During ML's heyday, a company run by ML's accountant, Radical Bunny, LLC, raised investor money at resort seminars and then made a series of loans to ML. Each of the loans was evidenced by a separate promissory note and purportedly secured by all of ML's assets, consisting of its note and deed of trust interests and certain real estate obtained through previous foreclosures. At the time of the bankruptcy filing, Radical Bunny was owed about $200 million. Numerous issues arose as to this claim. First, there was a question as to Radical Bunny's security interest in that, despite the enormity of the debt, there was no security agreement, it appeared ML's name was improperly identified on the UCC-1, and it failed to obtain deeds of trust on the real property. Radical Bunny argued that its security interest was based on a letter to Coles stating its notes were secured by ML's assets even though no collateral was specifically identified. It also argued that its secured interest in the REO was through a UCC filing on proceeds, i.e. the real estate foreclosed on was proceeds of the notes and deeds of trust on which it had a lien. The issue was never resolved and ultimately, Radical Bunny was granted a secured interest as part of the OIC Plan.

Whether secured or unsecured, Radical Bunny was the largest creditor and a driving force in the proceedings. To complicate matters, however, Radical Bunny was thrust into its own bankruptcy by an involuntary petition filed by its investors and eventually consented to relief under Chapter 11. Shortly thereafter, a trustee was appointed. The members of Radical Bunny have been sued by the Securities and Exchange Commission for various securities law violations relating to their fund-raising activities.

The Coles Contingency and the Multiple Conflicts
ML's sole shareholder was the S.M Coles Revocable Trust which also owned S.M. Coles, LLC, an entity apparently used by Coles for his private investment activities. The beneficiaries of the Trust were Coles' first and second wives. The creditors in the case claimed the wives had received benefit from Coles alleged wrong-doing. After Coles' death, a new trustee was appointed for the Coles Trust and he also served as the personal representative for Coles' probate estate. Then, a few months after ML's bankruptcy, Coles LLC filed a Chapter 11 bankruptcy to stop foreclosure on its real estate interests.

Undeniably, everything was intertwined. ML's funds could be traced as having been used by Coles LLC and in fact, ML filed a proof of claim in the Coles LLC bankruptcy for over $30 million. Coles LLC was ML's landlord and despite the fact that the Trust owned both entities, Coles LLC filed for and was awarded an administrative rent claim and an order for eviction.

Board governance became an issue. After management was ousted in the early days of the case, the Trust appointed two ML employees to serve as board members. Neither had board-related experience and because of Coles authoritarian management style, they had no experience in supervising the entire business. Significantly, both were also investors and one was the trustee for the company's 401(k) plan--also a significant investor.

The Other Committees
An Unsecured Creditor Committee was appointed, but that raised the problem of defining its constituency. The unsecured trade debt was relatively small, about $5 million. But, there was a question as to whether all of the investors should be treated as unsecured creditors. First, although investors had received a fractionalized interest in the borrower notes and deeds of trust, there was a dispute as to the validity of the assignments. The consequence with this determination would be that the notes and deeds of trust were property of the estate and hence, the investors were mere unsecured creditors. The second question was whether investors had an unsecured claim based on allegations that they were defrauded. Ultimately, they were granted an unsecured claim based on the amount of their deficiency in recovering on their notes.

Another committee was appointed representing certain a group known as the Value to Loan investors ("VTL's"). One of the ML investment vehicles was known as the MP Funds which were limited liability companies set up to purchase fractionalized interests in various borrower notes. ML investors could purchase an interest in an MP Fund and would have a more diversified investment. In order to fund the MP Funds, ML borrowed money from the VTL's, about $7 million. Thus, the VTL's were not creditors of ML but rather of the MP Funds which never filed bankruptcy. Nevertheless, yet another committee was established to protect their interest.

The Borrowers
Since ML was a hard money lender, it stood to reason that its borrowers could not qualify for conventional financing. Perhaps, that factor was irrelevant in the days of the company in which loans where by and large made on a 50 percent loan to value ratio. But, Coles had abandoned that model and began lending aggressively, including 100 percent construction loans on high-rise condominiums. The list of borrowers included several long-time Phoenix developers, rumored to have reputations for un-collectability and for hiding assets. The bankruptcy made it easy to flaunt non- payment and that much easier for other borrowers to follow suit. And, to make matters more difficult, the OIC decided to insert itself in dealing with borrowers even though that task was clearly within the purview of the company. To say the least, the borrowers seized on the confusion and what might have been ordinary lender "work-outs" became litigation fiascoes. Four borrowers filed bankruptcies, one representing about $120 million of the portfolio. Several borrowers filed lawsuits against the investors on theories of lender liability since the investors were the actual owners of the notes and deeds of trust.

One of the daunting issues in the case was the question of foreclosure. Since the notes and deeds of trust for each borrower property were held by multiple investors, foreclosure would mean taking title in the names of multiple beneficiaries. Then, how would title be conveyed without the consent of each of those beneficiaries. This problem will undoubtedly persist post-confirmation.

The Small Investor Group
The MP Funds had a number of smaller investors apparently so their investments would be diversified. One particular group known as the Mahakian Group hired counsel and was quite vocal in the case particularly in challenging ML's authority to modify the borrower loans. Eventually, however, the Mahakian Group became a co-proponent of ML's plan.

The Big Investor Group
Another significant investor group was known as the RevOps. These investors had invested in the individual borrower notes but then had received from the company a guarantee of payment. The RevOps represented a significant dollar amount of the investors, about $125 million. Some individual investments were as much as $40 million.

The Dynamics
Greed versus greed. In the first meeting with the company and the OIC, one committee member stated that he expected investors would receive 100 cents on the dollar. This position was voiced in July 2008 when people in every other kind of investment had lost at least two thirds of their investments and in light of the fact ML investors had 1) received double-digit interest rates when most people were receiving half as much and 2) signed multiple documents acknowledging the enormity of the risk of their investments. On the other hand, Coles had abandoned any notion of conservatism and was plunging the company into high-risk ventures with high-risk borrowers. And, he was apparently maneuvering investors in and out of loans, some on demand of the investors themselves, but all in a juggle to survive the company motto of "no investor has ever lost a dime with ML." Add in the Radical Bunny situation where the principal had solicited $200 million mainly from "moms and pops" on the strength of the return from ML. These dynamics created an extremely vitriolic atmosphere and made a consensual plan difficult.

The Plan of Reorganization

The Plan Alternatives
Prior to the bankruptcy, the company made the decision to suspend any solicitation of new funds from investors. So, the initial question was whether there was some sort of business to salvage or whether the fate of the company would be a liquidation of the portfolio. Certainly, the servicing of a $1 billion portfolio had value, but the "sale" of that value was daunting in a more-than-troubled market. More importantly, the largest investors wanted nothing to do with any kind of continued or reorganized ML.

The liquidation options were two-fold:

A pooling plan in which all of the notes and deeds of trust were placed essentially in a pool, liquidated, and the proceeds divided on a per investment basis; or
The somewhat "business as usual" liquidation of the portfolio.

The largest investors were firmly against a pool plan, even though the financial analysis showed that creditors would likely receive a larger distribution. The sentiment of many of the investors was that "I selected my investment and I'm going to stick with it."

Two plans were eventually filed, one by the OIC and the other by ML. They differed in three major respects: structure, financing, and the collection and use of the spread and fees. The OIC proposed a plan in which the investors would transfer their note and deed of trust interests to individual limited liability companies, about 47 in number, which would be managed by a single entity and serviced by another. Investors were given the option on the ballot to transfer their interests. It proposed exit financing which would be secured by the interests and it waived all spread and fees. Investors were given an unsecured claim called "Investor Damages," representing the difference between the amount of their notes and the amount eventually received. These amounts would be paid from a liquidating trust which would hold the remaining assets of the estate and the estate causes of action. The RevOps, Radical Bunny and general unsecured creditors would share in the trust as well.

The ML plan entailed a structure similar to the way it had operated in the past. Financing, however, was to be secured by the spread and fees and not investor interests, and investors would be given an across-the-board deficiency claim to be paid by the spread and fees. The investors, Radical Bunny, the RevOPs, and general unsecured creditors would also have an interest in the spread and fees and in a liquidating trust similar to that proposed by the OIC.

The initial OIC plan and disclosure statement were filed on January 21, 2009. The OIC disclosure statement was denied on March 24, 2009 and the OIC subsequently amended and eventually obtained approval of its disclosure statement on April 3, 2009. During this time period, Radical Bunny was somewhat of a wild card. It agreed to be a co-proponent of ML's initial plan, but on the eve of filing, reneged. ML filed on March 4, 2009. After additional negotiation, Radical Bunny agreed to be a co-proponent of an amended ML plan which had committed exit financing. However, again on the eve of filing, Radical Bunny again reneged. ML filed its amended plan and disclosure statement on May 12, 2009.

Balloting and The Rush to Confirmation
Despite the support of the main investor classes, the OIC plan was met with about 15 objections, including Radical Bunny and ML. The VTL's, RevOps, Radical Bunny which were all separately classified, voted against the plan. Initial confirmation was scheduled for Wednesday, May 13, 2009. The Court set final confirmation for Monday, May 18, 2009 giving the parties two business days for discovery and preparation.

The Turning Legal Issue
By final confirmation, the OIC had resolved most of the objections except those raised by an individual investor, ML and Radical Bunny. The RevOps announced that they probably had a deal but it was not finalized. The turning point ended up being a ruling from the Court on a motion filed by Radical Bunny a few weeks prior to confirmation.

The OIC's plan proposed classes for "Investor Damages," for unpaid principal and interest on what investors expected to receive; that is, a sort of deficiency claim. In addition, it proposed treatment for the VTL's although they were not creditors of ML. Radical Bunny filed a motion under Bankruptcy Rule 3013 to challenge the inclusion of these classes. Of principal importance was Radical Bunny's argument that the investor claims should be subordinated based on Section 510(b) of the Bankruptcy Code. The basis of the argument was that any damages claimed by investors related to the purchase or sale of a security, i.e. the interests in the borrower notes, and thus were subject to mandatory subordination under 510(b). It also filed a motion challenging the RevOp claims. The motions became known as the 510(b) motions.

Radical Bunny argued the 510(b) motions on the first day of final confirmation and the Court took the matter under advisement. Radical Bunny continued to prosecute its objection to the OIC plan as did ML. However, in the middle of trial, the Court ruled on the motions and denied all relief. That was the turning point. Radical Bunny determined it would no longer resist confirmation of the OIC plan. At that point, ML and the Mahakian Group believed a continued confirmation battle would not be in anyone's best interest and withdrew their objections to the OIC plan. It was confirmed and became effective on June 15, 2009.

Conclusion
Many issues could have been fought; perhaps a better plan could have been achieved by all parties, but the driving force was the need to emerge from bankruptcy. When asked why he had decided at the last to support the OIC plan although his client would receive more under the ML plan, one of the lawyers said the OIC will just continue the fight. Without payments from borrowers, the company was out of cash and was administratively insolvent. Each time there seemed to be a shoreline in sight; it was only the eye of the storm.

Unfortunately, borrowers are still not paying, the real estate market is not yet recovering, mechanic lien holders still claim priorities in a substantial number of the real estate projects, and investors are not receiving any distributions. Extensions have been sought to convince investors who did not agree to transfer their interests to the new limited liability companies to do so. But, a plan has been confirmed and a navigation of sorts set. As lawyers for ML were sitting at the ML offices preparing for final confirmation, the ML sign outside of the office fell down-there was no wind. Was it a signal that it was the end of the storm, or as time will tell, was it the beginning of another.

Recent Changes to Arizona Foreclosure Law Repealed

On September 4, 2009, Governor Brewer signed House Bill 2008, which repeals Senate Bill 1271 and its changes to the Arizona anti-deficiency statute. The real estate community's efforts were successful; and the recent changes to the law sought out by the lending industry, signed by Governor Brewer on July 1, 2009, and scheduled to go into effect on September 30, 2009, have been repealed.

As a result of this repeal, property owners (including owners of second homes and investment properties) in the state of Arizona owning qualified real estate (residential property on two and one-half acres or less and utilized for either a single one-family or single two-family dwelling) will continue to receive the protections afforded by Arizona's anti-deficiency statute.

To view the original client alert, or to recap on the details of SB 1271, visit our website. If you have any questions or concerns about this change in Arizona's foreclosure law, contact Brian N. Spector.

Trademark Fights Take Shape During Tough Economy

As companies fight for new business and look to keep what they already have, protection of a company's core identity is more important than ever.

Words, slogans and designs that you use to identify and distinguish your goods and services from others are eligible for federal registration with the U.S. Patent and Trademark Office (the "PTO"). A federal trademark registration gives a company presumptive ownership and the exclusive right to use the trademark in connection with the goods and services identified in the federal registration. For this reason, it is important to not only protect your brands through federal registration, but to also monitor the trademark registration activities of others.

Three recent cases show the importance of protecting your brand, and monitoring the actions of others:

1. Recently, The Laptop Company, owner of the online shopping service "BongoBing," made a preliminary filing with the PTO in opposition to Microsoft's application for federal registration of the "Bing" trademark for its new search engine. The BongoBing website provides information on products primarily in the home and garden area. The website is designed to look like a search engine, where you can search or "Bongo" for products.

Although The Laptop Company claims trademark rights to BongoBing, it has never filed an application for federal trademark registration. The company has received an extension through December 16, 2009, to formally oppose the registration of "Bing."

2. Oprah Winfrey and her production company, Harpo Productions, Inc., are trying to stake Oprah's exclusive claim to the term "Aha! Moment." Last year, the insurance company Mutual of Omaha filed an application for registration of the slogan "Official Sponsor of the Aha Moment," which became part of a national advertising campaign in February. After the Mutual of Omaha mark was approved by the PTO, it was published for opposition by third parties. When no opposition papers were filed, the PTO issued a Notice of Allowance.

On the same day the Notice of Allowance was issued, Oprah's lawyers sent a "cease and desist" letter to Mutual of Omaha, claiming that the slogan violates Oprah's rights in the "Aha Moment" and demanding that the company cease use of the mark. Not to be outdone, Mutual of Omaha filed a lawsuit in federal court days later, asking a judge to allow the company to use its slogan without interference from Oprah. The litigation is ongoing.

In the meantime, Harpo has filed its own applications for federal registration of "Aha! Moment," one of which (for magazine columns) was published for opposition on September 1, 2009.

3. When consumer electronics retailer giant Best Buy learned that a division of United Technologies known as the "Geek Patrol" was providing the same computer repair services as the Best Buy "Geek Squad," the company went straight to federal court with allegations of trademark infringement, unfair competition, and deceptive trade practices. Best Buy identified an online directory listing for the Geek Squad that stated "GEEK PATROL we can send a Squad of geeks to you" and "WE ARE THE BEST BUY." The lawsuit, filed last month, has resulted in some changes to the Geek Patrol website. Time will tell who ultimately prevails in this real life "geek drama."

For more information regarding the issues in this publication, please contact Brad Hartman via email at bhartman@jsslaw.com or via telephone at 602.262.5842.

Google's AdWords Program Continues to Challenge Trademark Owners and The Courts

The debate over the open sale of trademarks to trigger online advertising at Google has been heating up. Google AdWords allows anyone to bid on keywords that, when searched by others, wins the owner high placement in the search results page based on a combination of factors. This means that your company can bid on the word "shoes," for example, in order to have your footwear company placed prominently among the search results.

But what if you want to use the NIKE trademark to trigger an ad for your footwear website? And what if you don't even sell NIKE shoes? In most instances Google allows any company to bid on keywords and place advertising using another company's trademark.

Courts across the United States have reached different conclusions on whether Google's use of trademarks as AdWords constitutes "trademark use in commerce," a necessary element of a successful trademark infringement lawsuit. The 9th Circuit, which includes Arizona and California, has held that the sale of trademark-protected words in the AdWords program is a "use in commerce" for purposes of federal trademark law. Courts in the 2nd Circuit, which includes New York, have held otherwise, holding that Google's actions are not a "use in commerce" under federal trademark law. The courts have largely accepted Google's contention that there is no trademark use in commerce because any use of the mark is internal only, and Google had never "used the mark" publicly by placing the trademark on any goods, containers, advertisements, or anything else visible to the public.

This split between east and west, or 2nd and 9th circuit, may be changing. Recently, the 2nd Circuit Court of Appeals for New York reversed a lower court's determination on the "use in commerce" issue. In Rescuecom v. Google, the Second Circuit found that selling trademarks as search engine advertising keywords can be a "use in commerce." "What Google is recommending and selling to its advertisers is Rescuecom's trademark," said the Court's ruling. "Google displays, offers, and sells Rescuecom's mark to Google's advertising customers when selling its advertising services."

We haven't seen the end of this issue. Other cases are pending against Google, and Google is said to be liberalizing its policy to permit use of third-party trademarks in some ads themselves. It remains to be seen whether the 2nd Circuit will distinguish a competitor's purchase of trademarks for use in keyword searches from Google's sale of trademarks.

For more information regarding the issues in this publication, please contact Brad Hartman via email at bhartman@jsslaw.com or via telephone at 602.262.5842.

Tax Client Alert: Deadlines Approaching For Special NOL Carrybacks

NOTE: An update to this client alert was posted on December 29, 2009.

Time is running out for many businesses wishing to take advantage of the expanded business loss carryback option included in the 2009 recovery law. Eligible calendar-year corporations have until September 15, 2009 to file the appropriate forms. Eligible individuals have until October 15, 2009 to choose this expanded carryback option.

This carryback provision offers small businesses that lost money in 2008 an excellent way to quickly obtain some much needed cash if the business was profitable in previous years. This option is only available for a limited time, so small businesses should consider it carefully and act before it is too late.

Under the American Recovery and Reinvestment Act (ARRA), enacted in February, many small businesses that had expenses exceeding their income for 2008 can choose to carry the resulting loss back for three, four or five years, instead of the usual two. This means that a business that had a net operating loss (NOL) in 2008 could carry that loss on their books as far back as tax-year 2003. Not only could this mean a special tax refund, but the refund could be larger, because the loss can be spread over as many as five tax years, rather than just two.

This option may be particularly helpful to eligible small businesses with a large loss in 2008. A small business that chooses this option can benefit by:

Offsetting the loss against income earned in up to five prior tax years,
Getting a refund of taxes paid for up to five prior years,
Using all or part of the loss now, rather than waiting to claim it on future tax returns.

The option is available for an eligible small business (ESB) that has no more than an average of $15 million in gross receipts over a three-year period ending with the 2008 tax year. Unless the appropriate election is made prior to the referenced deadlines, the taxpayers will not be eligible to take advantage of the expanded carryback period.

Many taxpayers are also revisiting whether losses that arose from 2008 taxable transactions generated ordinary losses, or capital losses. Ordinary losses may be eligible for the expanded carryback treatment. Capital losses only can be carried forward to future tax year, and then only can be utilized to offset future capital gains, or, to a very limited extent, the ordinary income of the taxpayer.

Each case a business or individual may face is unique and may require legal advice. If these changes apply to you, or you have other tax related questions, please contact either Jack N. Rudel or Richard C. Smith.

Antitrust and Trade Associations: Why Compliance Matters

Recent events have highlighted the need for trade associations such as IDEA to be aware of - and take proactive steps to comply with - antitrust laws. In May 2009, the Obama administration made its position known on antitrust enforcement: Speaking to the U.S. Chamber of Commerce, Assistant Attorney General Christine A. Varney of the Justice Department's antitrust division remarked that the relaxation of antitrust enforcement at the outset of the Great Depression was a mistake and that vigorous enforcement must accompany efforts to revive the distressed economy. Earlier, in March, the Federal Trade Commission (FTC) required the National Association of Music Merchants (NAMM), a trade association of musical instrument sellers, to enter a consent decree that tightly restricted the organization's activities for years. This ruling was considered a wakeup call to all trade associations.

IDEA's leadership has historically remained sensitive to antitrust concerns and has steered the organization and its members clear of unlawful conduct. But given a renewed focus on antitrust enforcement generally and the role of trade associations in particular, this is a good time to review how and why IDEA conducts its meetings and guides members toward compliance.

Overview of Antitrust
Antitrust law aims to maintain competitive markets in the face of business conduct that might seek to increase profits by eliminating competition. For simplicity, let's consider there to be two main categories of antitrust laws: those regulating the activities of a single dominant firm or monopoly, generally addressed by Section 2 of the Sherman Act, and those regulating joint action among competitors, addressed by Section 1 of the Sherman Act.

Another area of antitrust law pertains to challenged conduct. The antitrust laws only forbid restraints of trade that are considered "unreasonable." Courts and agencies therefore apply a so-called Rule of Reason, examining the nature of the conduct, the market in which it occurs and the positive and negative impacts it may have on competition in the relevant market. This is a complicated, economics-driven inquiry with general rules but few concrete guideposts.

By contrast, certain marketplace conduct is considered anticompetitive (and illegal) per se, having no redeeming positive effects on competition. Agreements to fix prices, rig bids, divide territories or allocate customers or market segments fall into this category of business activity. Even if the argument can be made that this conduct benefits consumers, it is prohibited. Many times this conduct will bring harsh criminal penalties as well as civil suits.

Trade Association Activities
Activities of trade associations have been suspect since before the founding of this nation. Writing in 1776, Adam Smith warned, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." (Wealth of Nations [1776], Vol. I, Ch. 10, pt. 2.) On the other hand, cooperation, education and information exchanges through trade associations most frequently generate improved efficiencies, technological advances and better value for consumers, so nobody opposes the ongoing existence of the organizations. Antitrust regulators try to keep the balance tipped toward the benefit side.

The most common dangers posed by trade associations are (1) anticompetitive conduct by the association itself and (2) association provision of resources and facilities to abet member collusion. In the first category are exclusionary actions such as membership rejections or expulsions for anticompetitive reasons (e.g., price discounters); denying non-member access to commercially crucial association services or trade show participation; discriminatory standard setting; codes of ethics that restrict advertising, business relationships, pricing, competitive bidding or services offered; and collection and dissemination of non-public price-signaling information. The IDEA board, professional staff and counsel must remain knowledgeable about the rules and nuances surrounding these activities and assure that a proper balance is struck. To date, they have been quite successful in carrying out these responsibilities.

The second category involves joint action by members to enhance profitability by constraining the marketplace. IDEA is different from many other trade associations in that the nature of the district energy industry offers scant incentive for members to conspire against the public. District energy system operators generally do not compete against each other; nor do they generally sell their heating/cooling/energy output in a consumer market. So there is no incentive for them to conspire to keep output low, prices high or the number of competitors small. IDEA members who are service providers, vendors or suppliers to the district energy industry have little incentive to collaborate to stabilize prices or markets, as this could directly harm the owner/operator members. Therefore IDEA is an unlikely forum for such endeavors.

Even though anticompetitive conduct is unlikely, IDEA should remain vigilant in overseeing the discussion agenda at membership gatherings because the consequences of faltering can be severe:

A violation of the antitrust laws carries potential penalties that include criminal prosecution with fines of up to $1 million per violation for individuals and $100 million for corporations and/or jail sentences of not more than 10 years and civil remedies of treble damages, attorney's fees and injunctive relief.
Trade associations can be found liable for the antitrust violations of their agents acting within the scope of their apparent authority - i.e., the agent appears to be acting in the ordinary course of the association's business. Associations generally are liable for actions of member volunteers (including board members and commission/committee members) taken under the auspices of the association, even if the specific actions were not authorized by the association. No ratification by the trade association of the agent's conduct is required for a finding of liability.
Membership in a trade association that has been found to have engaged in unlawful behavior may be used as a basis to infer complicity in anticompetitive behavior. If a court finds that a member had knowledge of unlawful behavior, the court may infer participation. Thus, if a member knows or should have known that the association was involved in unlawful behavior, that member may be deemed to be a co-conspirator.

Given the risks, it follows that IDEA should be sensitive to antitrust concerns as it plans and conducts its affairs. IDEA, like any trade association, should take affirmative steps to ensure that none of its public pronouncements or other activities could be misconstrued as facilitating, condoning or calling for any concerted action that violates the antitrust laws. These include control over meeting agendas and requiring adherence to the agenda. IDEA's Antitrust Policy Statement (see sidebar), read at the outset of formal gatherings, is designed to educate members about significant prohibited conduct and to attempt to protect the membership in the event that someone does not take it seriously.

Lessons from NAMM
In the recent consent enforcement action noted above, the FTC charged that NAMM, the association of musical instrument manufacturers and sellers, enabled and encouraged the exchange of competitively sensitive pricing information among its members, primarily by sponsoring discussions of minimum advertised pricing (MAP) policies. (It is noteworthy that MAP policies are legal, though complicated to implement properly, and advising members about the rules seems reasonable; but conducting meetings tending to help many musical instrument sellers adopt MAP policies stepped over the line.)

The consent decree (see sidebar for highlights) requires appointment of an antitrust compliance officer (who for the first three years must be antitrust counsel) to approve agendas, prepared remarks and materials for all association events and board meetings and personally attend the functions. It also mandates annual antitrust training for staff and board members, implementation of mechanisms for reporting violations of antitrust laws and discipline of violators, reading of an antitrust compliance statement at the beginning of meetings and recording of each panel discussion and presentation at association events. The compliance officer must submit annual written reports to the FTC confirming compliance for 10 years, and the order remains in effect for 20 years. (For details on the NAMM case, including complaint, decision and order, consent agreement and related documents, go to www.ftc.gov; look for In the Matter of National Association of Music Merchants, Inc., Docket No. C-4255, [March 4, 2009]).

Of course, the NAMM is a qualitatively different organization from IDEA. It is made up of companies that compete directly with each other for sales of musical instruments to the public. Discussions of MAP policies also involved sharing of price, cost and profit margin information among competitors, which the authorities consider unlawful even if no price-fixing agreement was ever reached. IDEA's members would be unlikely to benefit from this kind of collaboration. Regardless of these differences, however, the case is very instructive. Antitrust practitioners have generally agreed that, with the possible exception of recording every event, the NAMM order should be considered a ‘best practices guide' for all trade associations. Happily, the IDEA leadership already has in place procedures and an Antitrust Compliance Manual implementing these best practices. (Members may download and read the manual in the Members Section on the association's Web site: www.districtenergy.org.) Members should refer periodically to that manual for general guidance and should have antitrust counsel available for the times when detailed analysis is needed.

A Patented Solution: Failing to File a Patent for a New Technology Could Cost a Company More than Money

It is arguably one of the most exciting moments for a technology entrepreneur - seeing that invention for the first time. Whether it's a new software program, mechanical device, or a breakthrough biotech discovery, the feeling is always the same. Pure elation. If you're a technology entrepreneur you know what feeling I'm talking about. You spend months, possibly years, working towards this moment. Now that you're here, you're ready to turn this exciting innovation into a business. But before you take that costly leap of putting together a company and going to market, consider one very important step that can save you, and your company, everything you've worked for - the elusive patent.

Who needs it? Many technology companies and entrepreneurs initially feel they don't need, or just can't afford, patent protection at the very initial stages of their business development. "No one else could develop this right now in the exact same way we have," or "It's already protected by trade secret laws," or "It's going to cost a lot of money right now, so we'll wait until the product is making us a profit." The truth is, not filing a patent to protect your proprietary technology could cost a great, great deal more in the end and might even make your company less attractive to investors and business partners.

Companies in a wide variety of technology fields increasingly rely on patents as a key tool to protect their proprietary inventions. For example, companies in the high-tech industry (software, semiconductors, etc.) and the life sciences/biotechnology industry (pharmaceuticals, medical devices, etc.) are spending more and more money on research & development and, thus, are increasingly looking to patents as a mechanism for protecting this expensive investment.

If you're a typical technology startup, you will likely need to find early-stage, mid-stage and, eventually, late-stage investors for capital to continue to fund your research & development and pay the tremendous costs associated with commercializing your products and services, potentially worldwide. Angel investors to venture capitalists are increasingly scrutinizing the adequacy and strength of a company's intellectual property assets as a part of the investor's decision to invest in that company. More than ever, investors are particularly expecting a company to have either filed for patent protection or already have some patents. Another significant ramification of failing to obtain adequate patent protection is that early, mid and late stage investors may place a significantly lower valuation on your company. Thus, taking steps to file for patents, and then eventually obtaining patents, is often a critical and significant step in proving credibility to any kind of investor.

Another major benefit of patent protection is using your patents as a legal mechanism to protect your company's most critical proprietary technology from infringement by competitors and others. Competition is fierce in the high technology and biotech/life sciences industries and your competition may knowingly, or inadvertently, use your proprietary technology in your competitor's goods or services to gain market share. Your patent is often a valuable tool to combat these serious situations and could be a key factor that differentiates your company from your competition, or even provides the life line that keeps your company in business.

Many technology companies, particularly startups, are not in a position to completely commercialize their proprietary technology in every country in the world and in every "field of use" applicable to that proprietary technology. So, technology companies are often searching for competent parties who can be given a license to manufacture products, or perform services, that utilize the proprietary technology in a particular geographic area, in a specific "field of use", or both. Potential licensees, however, will increasingly scrutinize the level of patent protection given to your proprietary technology before they commit to being a licensee. The main reason for this increased scrutiny is that the potential licensee will ultimately need to spend more money to further develop your invention (into a final product or service) and to develop the costly infrastructure needed to efficiently manufacture and/or distribute a final product or service that uses your technology. Thus, a potential licensee wants to make sure your technology is adequately protected before the licensee is willing to make this tremendous investment to commercialize your technology. So, taking steps to file for patent protection can increase your company's ability to find proper licensees. Patent protection can also increase your negotiating leverage when entering into contracts with licensees and could have a significant impact on the level of royalties and other compensation that licensees agree to pay you for the use of your proprietary technology. Indeed, potential licensees who still want rights to your technology very often negotiate significantly lower royalty payments if you have failed to obtain proper patent protection because the licensee deems your technology to simply be unprotected "trade secrets." As a bottom line, taking steps to obtain proper patent protection can potentially increase the revenue stream to your company from others that want to use your technology.

There is no denying that it can be costly to file for patent protection. But protecting your patent rights is often a valuable investment in your company's future. With proper patent protection, you can head into the technology marketplace with a leg up, securing your business' long-term prospects, and ensuring that all of your hard work doesn't go to waste.

An Important Change Affecting Arizona Foreclosure Law

On July 1, 2009, Governor Brewer signed into law an important change to Arizona's anti-deficiency statute. Previously, a lender foreclosing a deed of trust on qualified real estate (i.e., residential property of two and one-half acres or less and utilized for either a single one-family or single two-family dwelling) could not bring an action to recover any difference between the amount of its claim and the amount obtained by the foreclosure sale. As a result of the change, the protection now only applies to a foreclosure sale of such residential property that is used by the borrower as a dwelling for at least six consecutive months. The borrower has the burden of proving that.

This change in the law was sought by the lending industry. It was intended to take away the protection previously afforded to those who purchased residential real estate as rental and investment property.

A number of questions already have arisen regarding this change in the law. A few of them and the possible answers are set forth below:

Question: To receive protection, must the borrower have used the property for the six consecutive months immediately preceding the foreclosure sale?

Answer: No. The change appears intended to take away protection from borrowers who purchased residential property for speculation and investment. Accordingly, it should not apply to a borrower who, for example, initially lived in the property (for at least six months) but later turned it into a rental or for other reasons moved out. That also is consistent with a plain reading of the statute, which does not specify that the usage must occur immediately prior to the sale.
Question: Are the owners of second (i.e., vacation) homes protected?

Answer: Given the intent behind the change -- to take away protection previously afforded to speculators and investors -- vacation home owners ought to be protected if they can demonstrate that they used the property for six consecutive months. Arguably, usage need not be as a primary residence; it also can be the more sporadic kind associated with a second home. It could be argued that if the legislature wanted to limit protection to one's primary residence, it could have said that or used the term "resided" instead of "used."
Question: Does the change apply to owners who purchased and borrowed against property in reliance upon the protection afforded under the old law?

Answer: Yes. The change applies to all foreclosure sales that occur after September 30, 2009 - regardless of when the property was purchased or the loan was made - and, therefore, to sales of property owned by investors who purchased and borrowed in reliance upon the protection afforded under the old law. It remains to be seen whether such owners can successfully challenge the applicability of the change to transactions made in reliance upon the prior law.

According to recent newspaper reports, the Arizona Realtors Association and real estate industry lobbyists currently are working to get this change in the law repealed. Time will tell whether those efforts will be successful and/or whether the new law will be clarified to address the above questions.

If you have any questions or concerns about this change in Arizona's foreclosure law, contact Brian N. Spector at bspector@jsslaw.com or 602.262.5977.

NOTE: On September 4, 2009, Governor Brewer signed House Bill 2008, which repeals Senate Bill 1271 and its changes to the Arizona anti-deficiency statute. Please view our updated Client Alert.

Federal Minimum Wage Increase

Effective July 24, 2009, the federal minimum wage provisions contained in the Fair Labor Standards Act (FLSA) were increased to $7.25 per hour. Please note that many states also have minimum wage laws. In cases where an employee is subject to both state and federal minimum wage laws, the employee is entitled to the higher minimum wage. Overtime pay at a rate not less than one and one-half times the regular rate of pay is required after 40 hours of work in a workweek.

The Fair Labor Standards Act establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments.

Could You be Sued if Your Customer Database is Breached?

In the age of computer hacking and identity theft, more and more attention is being focused on the obligation of businesses to protect the security of personally identifiable information stored on its computers and in its databases.

Most businesses retain electronic records containing personal information about employees, vendors, and customers. Does holding that personal information and data create a duty to conceal and protect that information from others on behalf of the person about whom the data relates? Most courts have held that no implied duty exist. If you properly obtain non-confidential data from your employees, customers or vendors, you have the right to use it. The fact that you know your customer's home address and phone number, for example, does not create a duty to keep that information secure. Indeed, the customer's name, address and phone number may be known to many individuals and businesses.

But some employee, customer and vendor information is more sensitive, and may be delivered to your business under confidentiality agreements or under circumstances sufficient to imply a duty to protect the information from disclosure. For example, social security numbers, bank account information, personal health information provided for insurance purposes, and other sensitive data could be used by others for improper purposes. If it is foreseeable that damages could result from the public disclosure of sensitive personal, financial or health information, a business is wise to protect that information to the greatest extent possible.

Encrypt. Current laws generally apply only to "unencrypted personal information." All computer data containing sensitive information should be encrypted and opened only with a password to prevent unauthorized access.
Limit. Business policies and practices should limit access to sensitive data to those individuals with a need to use the particular data in the course of their job duties.
Train. Train employees on the need to secure and protect sensitive data from unauthorized access, including personal information as well as company information, such as marketing plans and strategies, product designs, and manufacturing processes. Additionally, train employees on how to spot unauthorized access to sensitive data so that your company can be vigilant in identifying data theft and complying with laws that require prompt notice to impacted individuals. Evidence of employee training can help the company avoid a punitive damages award in the event of unauthorized access.
Monitor. Today's network technologies can help you identify unauthorized data access attempts, such as multiple erroneous password entries, access to the database from an IP address or location outside the company, file modifications that evidence copying or emailing of sensitive data, or after-hours access to a secure database.

If your database is ever breached, the worst thing you can do is ignore the breach and hope that no one will find out or nothing will be used improperly. Be warned that there are state and federal laws that require businesses to take specific actions to promptly notify affected individuals and assist those individuals with protecting their financial records and credit rating.

Use of Celebrity Images in Advertising Has Risks

Clothing retailer American Apparel has agreed to pay Actor/Director Woody Allen $5 million to settle a lawsuit brought by Allen when he was featured in an American Apparel billboard campaign dressed as a Hasidic rabbi from his classic 1997 comedy, "Annie Hall." American Apparel defended the use of Allen's image as a satiric and social statement on a public figure, protected as free speech by the First Amendment to the U.S. Constitution. American Apparel said the billboards were designed to inspire dialogue, not to sell clothing.

Allen's attorneys disagreed, claiming there was no protected speech involved, but rather pure commercial advertisement rooted in the unauthorized use of Allen's image to promote American Apparel. Even though the American Apparel billboards came down within a week of Allen's initial complaint, Allen claimed that was long enough to falsely imply that Allen sponsored, endorsed, or was otherwise associated with American Apparel or its products.

The right of publicity is a person's exclusive right to use, and to prevent the unauthorized use of, his or her name, likeness, or other aspect of his or her persona for commercial gain. To use it without permission allows that celebrity (or any person) to file a claim against the business. The line between commercial speech and free speech may be fuzzy, but the American Apparel billboards seem to have been firmly planted on the commercial side of the line. If you would like to use celebrity images in your own advertising - even the images of deceased celebrities or celebrities lesser known than Woody Allen - it is best to obtain advance and unequivocal permission from the celebrity or the holder of his or her publicity rights. A business owner also would be wise to avoid using in advertisements words, logos, or designs that can be associated with other companies or products, which may raise claims under the federal Lanham Act.

Whether or not American Apparel would have succeeded with its defense will never be known. But we do know that American Apparel learned an expensive lesson: Using celebrities to endorse a product without their permission is going to get a business owner into trouble.

Act Quickly: Facebook is Creating New Opportunities and Challenges for Businesses, Individuals and Trademark Owners

This Friday night at 12:01 a.m. Eastern Time (9:01 p.m. PDT), Facebook will be releasing "vanity URLs" to registered Facebook users, in what is sure to be a landrush for businesses and individuals to adopt a unique, easy to remember URL for their Facebook profile and home page.

Until now, Facebook profiles have been identified on the Internet with a long series of nonsensical numbers (e.g., http://www.facebook.com/profile.php?id=0012343567). Beginning Friday evening, users will be able to obtain an easy-to-remember name for their Facebook pages, issued on a first-come, first-served basis (e.g., http://www.facebook.com/jsslaw). User names must be at least five characters in length and can only include alphanumeric characters (A to Z, 0-9) or periods. Generic words will not be available. To obtain a vanity URL, the Facebook account for your brand, product or organization must have been live on Facebook prior to May 31, 2009, and have a minimum of 1,000 fans.

Trademark holders interested in preventing their trademarks from being registered as usernames can submit their information to Facebook. Owners are required to submit a registration number for the trademark to be protected, and owners of multiple marks must submit a separate form for each mark to be protected.

Doing so will help prevent your valuable intellectual property from being registered and associated with a Facebook user. As they say, an ounce of prevention is worth a pound of cure.

Act quickly - the landrush begins Friday, June 12th at 9:01pm PDT.

The Next Chapter? In Tough Times, Filing for Chapter 11 Can be a Viable Solution

Bankruptcy. To many it is a word that invokes fear, mostly due to misunderstanding. For businesses struggling during these tough economic times, Chapter 11 bankruptcy can actually be an ally. Once businesses understand what bankruptcy entails, and how to determine if it is the right option for them, it can be much easier to face the process.

Download the related file to the right to read the full article:

A Legal Eye on Real Estate

Real estate transactions are very complicated. To ensure a smooth transition many people hire a real estate attorney to guide the process. Bruce May of Jennings, Strouss & Salmon has been practicing real estate law in Arizona for over 30 years. Here he answers some of the most common questions about hiring a real estate attorney and the local real estate market.

May, 60, earned his law degree in 1978 from the University Of Oregon School Of Law and his undergraduate from Princeton University. He has extensive experience in representing local, regional and national developers, homebuilders, institutional and individual investors in all phases of the development process. His areas of expertise include acquisition, disposition and development of land for large-scale, master planned projects, retail centers, apartments, offices, industrial developments, resorts and other incomeproducing projects. He also is experienced in land planning, subdivision regulation, liquor licenses, acquisition and development financing, purchase and sale agreements, leases, partnership and management agreements, business asset acquisition, management and disposition, office and retail leases and acquisition and sale of property for locations in various states. May's professional affiliations include The American College of Real Estate Attorneys, American Bar Association and the International Association of Attorneys and Executives in Corporate Real Estate. He also serves as a member of the Phoenix Art Museum, Phoenix Community Alliance, Valley Partnership and the Phoenix Arts District Community Development Corporation.

Does a person really need to hire a real estate attorney when they buy real estate? Why?
May: "Yes. An attorney brings to a transaction expertise, experience and a level of sophistication and, often, creativity that are essential to a well-considered acquisition.

At what point during a project, acquisition or disposition should a real estate attorney get involved?
May: "In the very beginning. Real estate transactions are very complicated. To ensure a smooth transition many people hire a real estate attorney to guide the process. We handle everything from acquisition to disposition and the success of the disposition depends significantly on the manner of acquisition."

Who are your clients?
May: "As a real estate attorney I represent owners, lenders, borrowers, investors, developers, contractors, brokers, property managers, title insurers, escrow agents, municipalities and syndicators."

Do you represent tenants?
May: "Yes, I negotiate leases and enforce tenant rights. In this market I typically do more work for landlords."

Do you work alone on most transactions or as part of a legal team?
May: "One attorney can work a deal, but given the size and nature of the transaction it is often a team effort. I work with a number of attorneys in my office on real estate transactions and I assist in drafting core or ancillary documents."

What services do you provide to a developer buying raw land, for example?
May: "I provide a number of services. A few of them include:

Identification and formation of entity to acquire title.
Negotiate a purchase contract that ensures the property is evaluated sufficiently and meets the needs of the client, or enables the client to terminate the contract if it does not.
Ensure proper due diligence including title and survey review, leases, covenance, conditions and restrictions and other related documents and issues.
Negotiate the loan documents that will enable the buyer to acquire and develop property on satisfactory terms.
Create legal infrastructure that will enable the developer to pursue its short and long-term plans.
Negotiate construction contracts for any improvements that may need to be modified or constructed.
Negotiate joint venture agreements with third party investors or other developers for coordinated undertaking.
Enter into development agreements with municipalities or other government entities."

What type of transactions do you handle most often in the Phoenix market?
May: "Over the past year, the real estate market in Phoenix has been up and down. So most of what I've been doing lately is working out obligations that have gone into default and enforcing remedies for existing arrangements. On the transactional side, I've been representing buyers and sellers of improved property such as industrial and office buildings and retail."

When guiding your clients, what skills are critical to your success?
May: "I consider experience, expertise, flexibility and creativity the four elements necessary for client success. You also have to be an expert at closing the deal, which means being thorough, prepared and capable of adapting to the dynamic situations that closings often require."

How do you stay on top of all the new regulations?
May: "I conduct a lot of transactions that require review of current law. I also read a lot. I spend hours reviewing publications that offer insight into developing trends in real estate law, recent cases and current solutions or troubles people encounter in the area I work."

How has the downward shift in the real estate market affected your business?
May: "Business has lightened up since the turn of the real estate market. There is no money in this market and no one is spending money. Arizona has been affected by the collapse of the financial market as much as any state in the United States and that's no exaggeration. To pursue development you have to have money. To dispose of property and make money you have to have someone that wants to buy and assume property ownership. A year or two ago that was not an issue. But in the current climate it's very difficult. My crystal ball isn't any clearer than anyone else's, but I'm optimistic that by 2010 everything will have adjusted itself."

How does a potential client find a real estate attorney?
May: "Word of mouth is a good way, or through publications that rank attorneys in accordance with their real estate expertise. A good source for people to use is The Best Lawyers in America. I've been listed in this publication for 25 years along with a handful of other attorneys in the city."

Arbitration Update: More on Judicial Review of Arbitration Awards

Last fall, I wrote a paper about the conflict between Federal law and California law relating to judicial review of arbitration awards. (See Jennings Strouss web site (www.jsslaw.com), Judicial Review of Arbitration Awards, Michael R. Palumbo, November 12, 2008). That paper discussed the diametrically opposed conclusions of the U.S. Supreme Court case Hill Street Associates v. Mattel, --- U.S.---, 128 S. Ct. 1396, 170 L.Ed. 2d 254 (2008) and the California Supreme Court decision in Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334, 190 P.3d 586 (2008). In sum, these cases inform us that parties to arbitration contracts in California, who base their arbitration contracts on California statutes, may provide for judicial review of an arbitrator's decision, while parties who seek arbitration under the Federal statutory scheme may not increase judicial review of arbitration decisions beyond the strict terms of the Federal statute. This paper focuses on the development of Federal law in this area in light of the Hill Street Opinion.

As noted in the earlier paper, The Federal Arbitration Act (FAA), which can be found at 9 U.S.C.A. § 1. et seq., restricts the right of appeal of an arbitration decision. Under the FAA grounds for judicial intervention in an arbitration award include where the award was procured by "corruption," "fraud" or "undue means" and where the arbitrators were "guilty of misconduct" or "exceeded their powers." Grounds for modifying or correcting an award, as compared to vacating an award, include "evident material miscalculation," "evident material mistake" and "imperfections in matter of form not affecting the merits."

Although it is not specifically listed in the FAA, "manifest disregard" has been an acceptable judicially created basis for reviewing arbitration awards for sometime. The U.S. Supreme Court implicitly recognized the approach in Wilko v. Swan, 346 U.S. 427, 436-37, 74 S. Ct. 182, 98 L. Ed. 168 (1953) where, citing the FAA, it stated: "Power to vacate an [arbitration] award is limited.... the interpretations of the law by the arbitrators in contrast to manifest disregard [of the law] are not subject, in the federal courts, to judicial review for error in interpretation." [Before Hill Street, all federal appellate circuits and many state courts, but not Arizona, recognized the manifest disregard doctrine.(Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. Appx 415, 2008 WL 4899478 (6^th, Cir. 11/14/08)]

In Hill Street, the Supreme Court held that the FAA provided the exclusive grounds to vacate or modify an arbitration award. 128 S. Ct. at 1404. Although it was not directly at issue in Hill Street, because of this holding, and the fact that the FAA does not list "manifest disregard", federal district and appellate courts have reached opposing views on the continued viability of the manifest disregard standard for reviewing arbitration awards. [In Hill Street, the Supreme Court was equivocal in discussing the "manifest disregard" standard. Without deciding, it stated: "Maybe the term "manifest disregard" was meant to name a new ground for review, but maybe it merely referred to the § 10 grounds collectively, rather than adding to them. Or, as some courts have thought, manifest disregard may have been shorthand for § 10 (a) (3) or § 10 (a) (4), the subsections authorizing vacatur when the arbitrators were "guilty of misconduct" or "exceeded their powers". 128 S. Ct. at---] As more fully discussed below, the Ninth Circuit, Second Circuit and the Sixth Circuit federal appellate courts believe that manifest disregard has continuing vitality, while the First Circuit, the federal District court from Minnesota and the Supreme Court of Alabama (applying the FAA) disagree.

What is the manifest disregard doctrine? "...[R]eview under the doctrine of manifest disregard is severely limited. ...It is highly deferential to the arbitral award, and obtaining judicial relief for arbitrator's manifest disregard of the law is rare." Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 388 (2d. Cir. 2003) The manifest disregard doctrine allows a reviewing court to vacate an arbitration award only in "those exceedingly rare instances where some egregious impropriety on the part of the arbitrators is apparent." (Id.) A federal court cannot vacate an arbitral award merely because it is convinced that the arbitration panel made the wrong call on the law. On the contrary, the award should be enforced, despite a court's disagreement with it on the merits, if there is a "barely colorable justification" for the outcome reached. Wallace v. Buttar, 378 F.3d 182, 194 (2d. Cir. 2004 )

Several elements must exist before the court can find manifest disregard. First, the law that was allegedly disregarded must be clear and explicitly applicable to facts before the arbitrators. Misapplication of ambiguous law dos not constitute manifest disregard. Second, the law must be improperly applied, leading to an erroneous outcome. If the result is justified for other reasons, the doctrine is inapplicable. Third, the law must be known by the arbitrators and its applicability must have been pointed out by one of the parties. Duferco, 333 F.3d at 389-90. According to the Sixth Circuit, an arbitrator acts with manifest disregard if "(1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrators refused to heed that legal principle." Merrill Lynch Pierce Fenner & Smith., Inc. v. Jaros, 70 F.3d 418, 421 (6^th Cir. 1995.)

In Comedy Club, Inc. v. Improve West Associates, 553 F.3d 1277 (9 Cir. 2009), the Ninth Circuit explained why it concluded that manifest disregard is still viable after Hill Street Associates. The Ninth Circuit acknowledged that Hill Street stands for the proposition that the FAA provides the exclusive grounds to modify or vacate an arbitration award. 553 F.3d at 1290. However, it rejected Improv West's argument that since manifest disregard is not listed in the statute, it cannot be used. Noting that the Supreme Court in Hill Street did not directly address the manifest disregard doctrine, but rather listed several readings of the doctrine (see above), it would continue to utilize its prior precedent that "the manifest disregard ground for vacatur is shorthand for a statutory ground under the FAA, specifically 9 USC § 10 (a) (4), which states that the court may vacate ‘where the arbitrators exceeded their powers.'" (Id.) In other words, where an arbitrator meets the elements of manifest disregard summarized above, he has exceeded his powers and the reviewing court can properly vacate the arbitration award.

Using a somewhat different rationale, the Second Circuit Court of Appeals reached the same conclusion in Stolt-Nielsen, SA v. Animalfeeds International Corp., 548 F.3d 85 (2nd Cir. 2008). With respect to Hill Street, the Second Circuit noted that the Supreme Court "declined to resolve [the manifest disregard] question explicitly, noting instead that it had never indicated, in Wilko or elsewhere, that "manifest disregard' was an independent basis for vacatur outside the grounds provided in section 10 of the FAA." 548 F.3d at 94. The Second Circuit explained that it viewed the "manifest disregard" concept as a mechanism to enforce the parties' arbitration agreement and not a judicial review device.

We must therefore continue to bear the responsibility to vacate arbitration awards in the rare instances in which the arbitrator knew of the relevant legal principle, appreciated that this principle controlled the outcome of the disputed issue and nonetheless willfully flouted the governing law by refusing to apply it. (Cite omitted) At that point the arbitrators have "failed to interpret the contract at all (cite omitted), for parties do not agree in advance to submit to arbitration that is carried out in manifest disregard of the law. Put another way, the arbitrators have thereby "exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter was not made. (Cite Omitted.).

Id at 95.

In its decision upholding the applicability of the manifest disregard principle, the Sixth Circuit simply stated, "In light of the Supreme Court's hesitation to reject the "manifest disregard" doctrine in all circumstances, we believe it would be imprudent to cease employing such a universally recognized principle. Accordingly, this Court will follow its well-established precedent...." Coffee Beanery, Ltd. v. WW, LLC, 300 Fed Appx. 415 (6 Cir. 2008).

In contrast to the cases discussed above, three courts from distinctly different jurisdictions have concluded that the manifest disregard standard did not survive Hill Street. Those courts are the First Circuit Federal Court of Appeals, the Federal District Court from Minnesota and the Alabama Supreme Court. The First Circuit case is Ramos-Santiago v. United Parcel Service, 524 F.3d 120 (1st. Cir. 2008) Ramos-Santiago did not involve the FAA, so the issue was not before the court. Nevertheless, in a footnote, the Court stated: "We acknowledge the Supreme Court's recent holding in Hall Street Associates v. Mattel, Inc., --- U.S.---, 128 S. Ct. 1396, 1401-04, 170 L. Ed. 2d 254 (2008), that manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award brought under the Federal Arbitration Act."

In Prime Therapeutics LLC v. Omnicare, Inc., 555 F. Supp. 2d 993 (D. Minn. 2008), the Minnesota Federal District Court engaged in an extensive discussion of Hill Street and its impact on manifest disregard. The Court acknowledged that the Eight Circuit, where it is located and under whose precedents it is governed, had recognized the manifest disregard doctrine. 555 F. Supp. at 997. The Court read Hill Street as rejecting arguments that the statutory grounds for vacating or modifying an arbitration award were not exclusive. Rather, said the District Court, "the Supreme Court held that Sections 10 and 11 of the FAA provide the exclusive grounds for vacating and modifying an arbitration award." Id. at 998. The Court pointed out that the Supreme Court emphasized that there was "no hint of flexibility" in the FAA language and that the arbitration award "must" be confirmed "unless" one of the specific grounds set out in Sections 10 and 11 of the Act is present. Id. at 998-99. The Court went on to asked "But does this suggest that courts can no longer vacate an arbitration award based on judicially-created grounds such as "manifest disregard" of the law? After Hall Street, this Court believes the answer to that question is yes." Id. at 999.

In Hereford v. D.R. Horton, Inc., --- So.2d---, 2009 WL 104666 (Ala. 1/9/09), the Alabama Supreme Court was required to review the actions of a lower state appellate court in the context of an arbitration agreement that was governed by the FAA. Alabama courts had previously recognized that the manifest disregard doctrine controlled arbitrations under the federal scheme. The question before the Hereford court was whether the manifest disregard doctrine continued to apply after Hill Street. Noting that the Supreme Court in Hill Street "rejected the conclusion that it had adopted manifest disregard as an additional, non-statutory ground for relief from an arbitrator's decision" (2009 WL 104666at * 5), the Alabama Supreme Court held "that manifest disregard is no longer an independent and proper basis under the Federal Arbitration Act for vacating, modifying or correcting an arbitrator's award." (Id.)

In conclusion, the debate about judicial review of arbitration awards and the continued applicability of the "manifest disregard" doctrine will continue in the various federal and state courts until the Supreme Court again speaks on the issue. However, one thing is clear: if you are arbitrating under the aegis of the FAA and are in the federal courts, your ability to obtain judicial review of an arbitration award is, at best, very limited. And, if the Supreme Court decides that the manifest disregard doctrine no longer has any vitality, the scope of review will be limited even further.

If you are interested in preserving a right to appeal an arbitrator's award, you need to be careful to adopt the California approach discussed in the earlier article and then hope that your jurisdiction will agree with the California Supreme Court.

COBRA Revisions to the American Recovery and Reinvestment Act of 2009

The Department of Labor has just made model notices available to assist employers in complying with the COBRA provisions in the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA made temporary changes to the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), as well as continuation coverage under similar state laws.

Under ARRA, eligible former employees, enrolled in their employer's health plan at the time they lost their jobs, are required to pay only 35 percent of the cost of COBRA coverage. Employers must treat the 35 percent payment by eligible former employees as full payment, but are entitled to a credit for the other 65 percent of the COBRA cost on their payroll tax return.

Most employers should have already received the revised version of the "Employer's Quarterly Federal Tax Return", Form 941. This form is used to claim the new COBRA premium assistance payments credit, beginning with the first quarter of 2009.

Employers must maintain supporting documentation for the credit claimed. This includes:

Documentation of receipt of the employee's 35 percent share of the premium;
For insured employers, a copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier;
For self-insured employers, proof of the premium amount and proof of the coverage provided to the
assistance eligible individuals;
Proof of each assistance eligible individual's election of COBRA coverage and continued eligibility for COBRA coverage at any time during the period from September 1, 2008 to December 31, 2009;
Declaration of the former employee's involuntary termination.

The premium reduction applies to those employees involuntarily terminated, for reasons other than gross misconduct, between September 1, 2008 and December 31, 2009. The benefit is limited to nine months per employee.

Employers may need to retroactively credit employees who made payments for periods starting after February 17, 2009 and are also required to offer a second chance to employees who did not elect the coverage, or cancelled the coverage, no later than April 18, 2009.

Each case an employer may face is unique and may require legal advice. If these recent changes apply to your company, or you have other employment questions, please contact either Valerie Walker or John Egbert for more detailed information.

Why You Absolutely Need To Know Something About Bankruptcy: Designed for Those Wittingly or Unwittingly Drawn into the Bankruptcy Arena

When someone utters that dreaded "Bankruptcy" word, many people cringe and immediately conjure up images of debtors' prisons, insolvency, and in the wake of the recent Enron and WorldCom scandals, fraud and deceit. But, bankruptcy is really not such a horrific phenomenon from either the debtor or creditor perspective. Filing a bankruptcy does not necessarily mean an entity is in terminal financial
distress. Instead, bankruptcy can be an extremely useful business tool for a company to accomplish a beneficial sale of assets, obtain new financing or achieve a capital restructure. Creditors and potential
investors or purchasers can benefit from these aspects of bankruptcy just as much as the entity that files. Even in dire situations where a company is financially troubled, with knowledge and planning the debtor and its creditors can often salvage a decent outcome for all those concerned. But, there are traps for the unwary. These are the reasons why you really need to know something about the "B" word.

Please see the attached document for the complete brochure.

Employers Face Changes to the Americans with Disabilities Act (ADA)

Beginning on January 1, 2009, employers will have to comply with a new set of rules when it comes to disability discrimination in the workplace. On that date, recent amendments to the Americans with Disabilities Act ("ADA") will go into effect.

The Changes:

Since its enactment in 1990, the ADA has extended protections from discrimination and the right to reasonable accommodations to individuals who have a physical or mental "impairment" that "substantially limits" one or more "major life activity." Because the courts have interpreted those terms narrowly, the focus of ADA analysis over the past eighteen years has been on whether the individual is "disabled," and therefore eligible for ADA protections at all. This focus significantly limited the number of employees who could benefit from the ADA. For example, on the one hand, employees whose impairments do not cause "substantial" limits are not protected, but on the other hand, if their impairments are so "substantial" that the employees cannot perform the essential functions of their jobs, they are also not protected. Thus, only those employees within the narrow band between "substantially limited" and "too substantially limited" benefited from the ADA.

The recent amendments are intended to expand the definition of who is disabled so that the focus shifts from whether the employee qualifies for ADA protections to whether discrimination has occurred or reasonable accommodations can be made. Among other things, the amendments:

reject the U.S. Supreme Court's interpretation that "substantially limits" means "prevents or severely restricts," and calls for a less demanding standard;
prohibit consideration of mitigating measures such as medication, hearing aids or accommodations (other than ordinary eyeglasses or contact lenses) when determining whether an impairment constitutes a disability;
expand and clarify what fits within the definition of "major life activities;" and
provides that an individual who is merely regarded as having an impairment (regardless of whether he actually has an impairment or whether the impairment rises to the level of a disability) is protected from disability discrimination, but is not entitled to reasonable accommodations.

What the Changes Mean:

The amendments to the ADA mean that more employees (and applicants for jobs) will fit within the protections of the ADA. Employers will likely be required to make more accommodations for disabilities and will need to exercise greater caution when making employment decisions affecting individuals with physical or mental impairments. These changes, however, do not apply retroactively to decisions made prior to the January 1, 2009, effective date of the amendments.

Recommendations:

To ensure compliance with the revisions to the ADA we recommend that employers consider doing the following before the amendments take effect:

Recognize that more individuals are going to qualify for reasonable accommodations;
Train frontline supervisors to understand that any link between an employment decision and an impairment may give rise to a "regarded as" claim of discrimination; thus, supervisors must avoid comments about employees' impairments;
Establish a process for centralized decision making when employment decisions involve employees with physical or mental impairments and when employees request accommodations; and
Review policies and practices to ensure ADA compliance, particularly those related to post-offer medical examinations (choosing to revoke an offer of employment based on such an examination may give rise to a "regarded as" claim); and
Review and update (or, if necessary, create) job descriptions for all positions.

Judicial Review of Arbitration Awards

Alternative Dispute Resolution (ADR) generally means arbitration or mediation. Mediation is a non-binding process where a neutral third-party intermediary attempts to bring the disputing parties together to resolve a dispute voluntarily. Arbitration, on the other hand, is a binding process where the third-party neutral has the authority to, after considering the parties' respective positions through an evidentiary proceeding, make decisions on the issues that the parties must accept.

For the past decade or longer, ADR has been the darling of lawyers and clients, who seek alternatives to the prolonged and costly process of court litigation. This is reflected in the following facts: the number of disputes resolved by ADR has increased dramatically; traditional arbitration organizations have expanded the scope of their services to include mediation and other ADR activities; new arbitration organizations have been formed to compete with the traditional providers; and more and more lawyers are advertising their services as mediators and arbitrators. This article deals with a particular aspect of arbitration - the ability of parties to obtain judicial review of the decision of the arbitrator, in other words, an appeal.

State and Federal Arbitration Statutes
Each state and the Federal system have their own statutory arbitration scheme. The Federal Arbitration Act (FAA) can be found at 9 U.S.C.A. § 1. et seq. Many states, like Arizona, model their arbitration regimes on the Uniform Arbitration Act.[i] Typically, the governing arbitration statutes restrict the right of appeal of an arbitration decision. The Arizona statute, following the Uniform Act, provides that a court can review an arbitrator's decision only in the following circumstances: where the award was procured by corruption, fraud or other undue means; evident partiality by a neutral arbitrator; where the arbitrator(s) exceeded his powers; where the arbitrator(s) conducted the hearing contrary to law or to the substantial prejudice of one of the parties; and where the adverse party contested the arbitration and did not participate in the proceeding.[ii] Applying these provisions, Arizona courts have consistently recognized the limited role of trial courts in reviewing the arbitration award.[iii] Under the FAA grounds for vacating an arbitration award include where the award was procured by "corruption," "fraud" or "undue means" and where the arbitrators were "guilty of misconduct" or "exceeded their powers." Grounds for modifying or correcting an award include "evident material miscalculation," "evident material mistake" and "imperfections in matter of form not affecting the merits."[iv]

It should be noted that neither the Uniform/Arizona Act nor the Federal Act provides an appeal in circumstances where one party believes that the arbitrator(s) erred with respect to factual findings or application of law. In fact, there are many court decisions from numerous jurisdictions, including Arizona, that uphold the rejection of appeals on those grounds.[v] And, many courts have gone so far as to say that there is no right to contest an arbitration award even where the arbitrator clearly ignored the facts or the law.[vi]

To deal with what many perceive to be the unjust results of allowing an arbitrator such wide discretion, many lawyers have attempted to insert provisions in contractual arbitration agreements that require arbitrators to apply the law of the jurisdiction to the facts and provide the parties with a right to appeal the arbitrator's rulings if they believe that the arbitrator exceeded his authority by deviating from that standard. This drafting practice has resulted in one of the hot issues relating to arbitration practice over the past few years. The issue is whether parties to an arbitration agreement can contractually agree to a judicial review provision that will be enforceable in the courts. This issue stems from the conflict between the accepted concept that arbitration agreements are contracts between the parties who have the right and power to determine their own processes, and the traditional review limitations found in the various arbitration enabling statutes that are based on the long-held polices of cost saving and finality. As reflected in the cases discussed below, the answer to the question depends on the language of the arbitration agreement and the law of the jurisdiction that governs the arbitration process.

The starting point of the discussion lies in the fact that most courts view arbitration agreements as contracts, to be shaped by the parties through negotiations just as any other contract. And, because the parties have made their own deal, they are bound by it.[vii] The California Supreme Court has expressly held that in private arbitration, "[t]he scope of arbitration is...a matter of agreement between the parties" and "[t]he powers of an arbitrator are limited and circumscribed by the agreement or stipulation of submission."[viii] Other courts that have similarly held include the United States Supreme Court.[ix]

On the other hand, courts also generally recognize two other countervailing principles: the first is that parties enter arbitration agreements in order to obtain quicker, less expensive, final resolution of disputes[x]; and, second, that an arbitrator is free to decide matters submitted to him as he or she sees fit.[xi]

The tensions among these competing principles are reflected in the different treatments of the issues in this year's decisions of the United States Supreme Court in Hall Street Associates, LLC v. Mattel, Inc., --- US---, 128 S. Ct. 1396, 170 L. Ed 2d. 254 (2008) (applying the Federal Arbitration Act) and the California Supreme Court in Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334, 190 P.3d 586 (2008) (applying California's Arbitration Act). As more fully explained below, in Hall Street, the United States Supreme Court held that parties to an arbitration contract could not expand the review powers set out in the FAA. However, in Cable Connection, the California Supreme Court allowed the parties to do exactly that under the California statute.

Hall Street involved a lease dispute. After a bench trial in Federal District Court on some issues, the parties proposed to resolve the remaining issues by arbitration. Their arbitration agreement required the court to vacate, modify or correct any award if the arbitrator's findings of fact were not supported by substantial evidence or where the conclusions of law were erroneous. Although the procedural history is somewhat convoluted, essentially, after the arbitration, the District Court, applying the agreement's legal-error review standard, vacated the arbitrator's award. The Ninth Circuit Court of Appeals reversed on the grounds that the expanded review provisions were unenforceable. The Supreme Court agreed with the Ninth Circuit, rejecting the argument that arbitration is a matter of contract and that the FAA reflects a congressional desire to enforce such contracts.[xii]

However, the Supreme Court left open a huge loophole. The Court emphasized that its decision was based entirely on the FAA's judicial review mechanisms, and that it "decides nothing about other possible avenues for judicial enforcement of awards." The Court noted that the FAA is not the only way into court for parties wanting review of arbitration awards.[xiii] Other possible avenues into the Federal court system include state statutory or common law[xiv]; and, other alternatives including the Alternative Dispute Resolution Act of 1998 (28 USCA § 651. et seq.).[xv] Clearly, the Supreme Court did not issue a broad ban on judicial review of arbitration awards - "We express no opinion on these matters beyond leaving them open for Hall Street to press on remand."[xvi]

The California Supreme Court in Cable Connections, Inc v. DirecTV, Inc., 44 Cal.4th 1334, 190 P.3d 586 (2008) recently took a different tact in the context of the California Arbitration Act, which is very similar to the Arizona statute (and the Uniform Act). Similar to the FAA and the Uniform/Arizona Act, the CAA allows judicial review to vacate or modify an arbitration award under the following circumstances: (1) where the award was procured by corruption, fraud or undue means; (2) issued by corrupt arbitrators; (3) affected by prejudicial misconduct on the part of the arbitrators; or (4) in excess of the arbitrators' powers.[xvii]

In Cable Connections, Inc. the California Supreme Court decided that California's rule would be that parties in arbitration may obtain judicial review of the merits of an arbitration award by express agreement. The Court held that the following clause, providing for judicial review of an arbitrator's decision, was enforceable under state law: "The arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error." The California Supreme Court reasoned: "[T] failure to provide for [traditional judicial review] by statute does not mean the parties themselves may not do so by contract."[xviii] "If the parties constrain the arbitrators' authority by requiring a dispute to be decided according to the rule of law and make plain their intention that the award is reviewable for legal error, the general rule of limited review has been displaced by the parties' agreement."[xix] The Court went on to state: "Accordingly, policies favoring the efficiency of private arbitration as a means of dispute resolution must sometimes yield to its fundamentally contractual nature, and to the attendant requirement that arbitration shall proceed as the parties themselves have agreed."[xx] In sum, noted the Court, objections to expanded judicial review "are outweighed by the freedom of contract that is fundamental to arbitration..."[xxi]

Very significant in the analysis of the California Supreme Court was its emphasis on the need for express language granting judicial review of the arbitrator's decision. In approving the language quoted above, the Supreme Court distinguished the provision before it from other similar provisions that had come before the California appellate courts in recent years, which had been rejected as being too vague or too implicit to create the right to appellate review. Examples of those cases are Baize v. Eastridge Companies, LLC,[xxii] which included the phrases "the arbitrator shall apply California law" and "shall be constrained by the rule of law"; and Marsch v. Williams,[xxiii] California law "shall govern the interpretation and effect" of the contract.

Although the Arizona Court of Appeals has stated that a decision of an arbitrator on a question of fact or of law is final and conclusive, except when they conflict with the express guidelines or standards set forth or adopted in the arbitration agreement,[xxiv] Arizona appellate courts have not addressed these specific issues. Thus, even though the Smitty's Super-Valu language may suggest a position consistent with the California Supreme Court in Cable Connections, we do not know what the Arizona appellate courts will decide on this issue. Nevertheless, the lesson of these cases is clear: If you want to have the potential right to appeal an arbitration award, you should do the following:

You should make sure that you do not include a provision that the matter is to proceed under the Federal Arbitration Act; rather, make sure it is to proceed under the state's version of the Uniform Act or, maybe even better, the California Arbitration Act; and,
You should make sure the judicial review provision is very explicit. Clauses that are the slightest bit vague stand to be rejected.

[i] 1956 Uniform Arbitration Act (ULA) §§ 1 et seq.; A.R.S. § 12-501, et seq.

[ii] A.R.S. § 12-1512(A)(1-5).

[iii] See Fisher on behalf of Fisher v. National General Ins. Co., 192 Ariz. 366, 965 P.2d 100 (App. 1998) (Arbitrator's decision is generally final and conclusive; the Uniform Arbitration Act provides very limited grounds for the trial court to deny confirmation of an arbitration award.)

[iv] 9 U.S.C.A. §§ 10 and 11.

[v] Pavelich v. Farmers Ins. Co., 127 Ariz. 170, 618 P.2d 1096 (App. 1980) (Trial court can not substitute its view of evidence for that of arbitrator) and Hirt v. Hervey, 118 Ariz. 543, 578 P.2d 624 (App. 1978) (same).

[vi] Verdex Steel & Const. Co. v. Bd. of Supvr., Maricopa County, 19 Ariz. App. 547, 509 P.2d 240 (1973) (Even though a court reviewing an arbitration award might consider some rulings erroneous, the rulings are binding unless they result in an improper expansion of the arbitrator's powers.).

[vii] Arizona cases on this point include Valdiviezo v. Phelps Dodge Hidalgo Smelter, Inc., 995 F. Supp. 1060 (D. Ariz. 1997) (Arbitration is a matter of contract and a party cannot be required to arbitrate any dispute which he has not agreed to arbitrate.) and Smitty's Super-Valu, Inc. v. Pasqualete, 22 Ariz. App. 178, 525 P.2d 309 (1974) (The boundaries of the arbitrator's powers are defined by the agreement of the parties.).

[viii] Moncharsh v. Heily & Blase, 3 Cal. 4^th 1, 8-9, 832 P.2d 899, 902, 10 Cal. Rptr. 2^nd 183, 186 (1992) (citations omitted).

[ix] See, Hall Street Associates, LLC v. Mattel, Inc., --- U.S.---, 128 S. Ct. 1396, 1402 (2008) (arbitration agreements are on equal footing with all other contracts); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947 (1995) ("...[T]he basic objective [of arbitration agreements is] to ensure that commercial arbitration agreements, like other contracts, are enforced according to their terms...and according to the intentions of the parties."); and Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614, 625 (1985) (the Federal policy served by the FAA is "at bottom a policy guaranteeing the enforcement of private contractual arrangements.").

[x] Canon School Dist No. 50 v. WES Const. Co., Inc., 180 Ariz. 148, 882 P.2d 1274 (1994) and Old Republic Ins. Co. v. St. Paul Fire & Marine Ins. Co., 45 Cal App. 4^th 631, 638 (1996) ("the primary purposes of arbitration, quicker results and early finality").

[xi] See, e.g. Moncharsh, 3 Cal. 4^th 1, 10-12, 832 P.2d 899 ("arbitrators, unless specifically required to act in conformity with rules of law may base their decision upon broad principles of justice and equity and in doing so may expressly or impliedly reject a claim that a party might successfully have asserted in a judicial action..."; judicial deference to an arbitrator's findings of fact and application of law is based on the fact that the parties to the agreement knowingly take the risk of such error as a "trade off" in order to obtain speedy decisions.). See also Moshonov v. Walsh, 22 Cal. 4^th771, 775-777 (2000) ("When parties contract to resolve their disputes by private arbitration, their agreement ordinarily contemplates that the arbitrator will have the power to decide any questions .... Inherent in that power is the possibility the arbitrator may err in deciding some aspect of the case. Arbitrators do not ordinarily exceed their contractually created powers simply by reaching an erroneous conclusion on a contested issue of law or fact, and arbitral awards may not ordinarily be vacated because of such an error for the arbitrator's resolution of theses issues is what the parties bargained for in the arbitration agreement.").

[xii] Interestingly, before the Supreme Court's Hall Street decision, the Federal Circuits were split on the issue - 3 agreeing with unenforceability (Eighth, Ninth and Tenth Circuits) and 5 holding that the parties could expand review by contract (First, Third, Fourth, Fifth, and Sixth Circuits). (128 S. Ct. 1403, fn. 5.)

[xiii] Id. at 1406.

[xiv] Id.

[xv] Id. at 1407.

[xvi] Id.

[xvii] Code Civ. Proc., § 1286.2(a)(4).

[xviii] 44 Cal. 4^th at 1357, 109 P.3d at 601-02, emphasis in original.

[xix] 44 Cal. 4^th at 1355, 109 P.3d at 600, emphasis in original.

[xx] 44 Cal. 4^th at 1358, 109 P.3d at 602, quoting Vandenberg v Superior Court, 21 Cal App 4^th 815, 831 (1999). (Emphasis in original.)

[xxi] 44 Cal. 4^th at 604, 109 P.3d at 1361.

[xxii] 142

Each state and the Federal system have their own statutory arbitration scheme. The Federal Arbitration Act (FAA) can be found at 9 U.S.C.A. § 1. et seq. Many states, like Arizona, model their arbitration regimes on the Uniform Arbitration Act.[i] Typically, the governing arbitration statues restrict the right of appeal of an arbitration decision. The Arizona statute, following the Uniform Act, provides that a court can review an arbitrator's decision only in the following circumstances: where the award was procured by corruption, fraud or other undue means; evident partiality by a neutral arbitrator; where the arbitrator(s) exceeded his powers; where the arbitrator(s) conducted the hearing contrary to law or to the substantial prejudice of one of the parties; and where the adverse party contested the arbitration and did not participate in the proceeding.[ii] Applying these provisions, Arizona courts have consistently recognized the limited role of trial courts in reviewing the arbitration award.[iii] Under the FAA grounds for vacating an arbitration award include where the award was procured by "corruption," "fraud" or "undue means" and where the arbitrators were "guilty of misconduct" or "exceeded their powers." Grounds for modifying or correcting an award include "evident material miscalculation," "evident material mistake" and "imperfections in matter of form not affecting the merits."[iv]

You should make sure that you do not include a provision that the matter is to proceed under the Federal Arbitration Act; rather, make sure it is to proceed under the state's version of the Uniform Act or, maybe even better, the California Arbitration Act; and,
You should make sure the judicial review provision is very explicit. Clauses that are the slightest bit vague stand to be rejected.

[i] 1956 Uniform Arbitration Act (ULA) §§ 1 et seq.; A.R.S. § 12-501, et seq.

[ii] A.R.S. § 12-1512(A)(1-5).

[iv] 9 U.S.C.A. §§ 10 and 11.

[viii] Moncharsh v. Heily & Blase, 3 Cal. 4^th 1, 8-9, 832 P.2d 899, 902, 10 Cal. Rptr. 2^nd 183, 186 (1992) (citations omitted).

[xiii] Id. at 1406.

[xiv] Id.

[xv] Id. at 1407.

[xvi] Id.

[xvii] Code Civ. Proc., § 1286.2(a)(4).

[xviii] 44 Cal. 4^th at 1357, 109 P.3d at 601-02, emphasis in original.

[xix] 44 Cal. 4^th at 1355, 109 P.3d at 600, emphasis in original.

[xx] 44 Cal. 4^th at 1358, 109 P.3d at 602, quoting Vandenberg v Superior Court, 21 Cal App 4^th 815, 831 (1999). (Emphasis in original.)

[xxi] 44 Cal. 4^th at 604, 109 P.3d at 1361.

[xxii] 142 Cal App. 4th 293 (2006).

[xxiii] 23 Cal App. 4^th 238, 245 (1994).

[xxiv] See Smitty's Super-Valu, note 7.

Cal App. 4th 293 (2006).

[xxiii] 23 Cal App. 4^th 238, 245 (1994).

[xxiv] See Smitty's Super-Valu, note 7.