A lot happened in the legal industry in 2012. Companies and law firms alike struggled in the face of the still-difficult economy, and not all of them came out on top. Political turmoil reached a tipping point, new regulations came into effect, cases were won, lost and settled, criminals were jailed.
But through all the ups and downs, these 20 stories stayed with us. They're the ones we feel will have lasting impact, the historic decisions, the game-changing regulations and shocking scandals. As 2012 winds to a close, we hope that reviewing these stories will help in-house counsel prepare for the new challenges 2013 will bring.
We also asked our readers for their input, and you can see their picks for the top 20 stories of the year here.
1. Election Ended
The presidential election wasn’t just the top story of 2012, considering that candidates deluged Americans with a sea of polls, punditry and political ads as early as spring 2011. But all that came to an end on Tuesday, Nov. 6, as President Barack Obama bested Republican challenger Mitt Romney to win a second term in the Oval Office.
A near sweep of swing states such as Ohio, Virginia and Colorado fueled Obama’s win. Although some of those victories were narrow, they were enough to propel him ahead of Romney 332 to 206 in the electoral college, a more comfortable margin of victory than many pundits had predicted.
Television networks began projecting Obama’s re-election as early as 11:20 p.m. EST, although Mitt Romney did not officially concede until shortly before 1 a.m. In his subsequent victory speech at Chicago’s McCormick Place, Obama offered an enthusiastic crowd a hopeful vision following the bruising election season.
“Tonight, in this election, you, the American people, reminded us that while our road has been hard, while our journey has been long, we have picked ourselves up, we have fought our way back, and we know in our hearts that for the United States of America the best is yet to come,” he said.
In a brief concession speech, Mitt Romney urged both parties to work together despite their political differences. “At a time like this, we can’t risk partisan bickering and political posturing,” he said. “Our leaders have to reach across the aisle to do the people’s work. And we citizens also have to rise to the occasion.”
But Obama’s victory hasn’t put an end to the country’s political discord. The tight popular vote, in which the President held a slim 50 percent to 48 percent advantage, is one sign of ongoing divisions; another is the fact that the makeup of the House and Senate remain virtually unchanged after the election. This could spell continuing deadlock on such issues as health care, regulatory reforms, immigration and the impending “fiscal cliff.”
On the first two fronts, President Obama’s re-election scuttles Republican efforts to overhaul or repeal key pieces of legislation such as the Patient Protection and Affordable Care Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Companies must now prepare for the health care law’s individual mandate, set to take effect Jan. 1, 2014, as well as Dodd-Frank regulations that continue to come down the pipeline.
The future of immigration reform is less certain, but many experts say the country’s current laws are stifling economic growth by limiting the number of overseas employees companies can hire. A May 2012 report from the Partnership for a New American Economy detailed the negative consequences of these caps, arguing that “artificially low limits on the number of visas and serious bureaucratic obstacles prevent employers from hiring the people they need—and drive entrepreneurs to other countries, who are quick to welcome them.”
But before politicians deal with health care, Dodd-Frank or immigration, they will have to face the “fiscal cliff,” a combination of tax increases and spending cuts set to take effect in January 2013 if lawmakers cannot agree on a deficit-reduction plan. Experts predict that the mixture could plunge the country back into a recession.
Complicating matters further, the Treasury Department projects that the U.S. will hit its debt ceiling near the end of this year, which could force the agency to take “extraordinary measures” to stave off a government default. “The consequences of default and their magnitude are unknowable,” Venable Partner John Cooney wrote on InsideCounsel.com in May 2011. “To degrees that cannot now be estimated, interest rates that lenders would demand to hold our debt would rise, and the value of the dollar would drop, once our reputation as the safe haven for investments was compromised.”
Amidst this political turmoil, one thing is clear: The election may have ended in 2012, but Washington’s work is far from over.
2. Suing Schools
It’s hardly a secret that now is not exactly the best time to be graduating from law school. Employment is slowly improving, but it’s still not great, and many law school grads who found themselves disappointed by the harsh environment of the legal jobs market are lashing out at their alma maters.
Since February, the angry graduates have sued more than 30 law schools, including U.S. News & World Report Top 50 members American University Washington College of Law and Pepperdine University School of Law. The suits accuse the schools of misrepresenting their job placement data and, as a result, misleading students about the job opportunities for which they’re going into massive debt.
So far, the courts seem to be siding with the schools. New York Law School, Cooley Law School and DePaul University’s College of Law have all managed to get the cases against them dismissed, with judges ruling that schools are not to blame if graduates are unable to find jobs in today’s tough employment market.
For example, in Cooley’s case, Judge Gordon J. Quist wrote in his July decision that the school’s jobs data was “literally true,” even though it did not distinguish between grads working in legal and nonlegal positions. He also said that plaintiffs “unreasonably relied upon” the jobs data when deciding to attend Cooley.
In his September dismissal of the case against DePaul, Judge Neil Cohen expressed a similar sentiment. “Plaintiffs paid tuition in return for legal education which would prepare them to practice law,” he wrote. Paying tuition doesn’t guarantee someone a job.
However, Manhattan Supreme Court Justice Melvin Schweitzer did acknowledge the seriousness of the situation, writing as part of his March opinion in the dismissal of the case against New York Law School that he felt students did deserve access to transparent information about post-grad job opportunities. “It is this court’s fervent hope that all the heat generated around this issue over the last year will be replaced with a renewed sense of responsibility to prospective applicants and students,” he wrote.
3. Device Dispute
Apple Inc. emerged victorious in its widely watched multi- billion-dollar patent case against Samsung Electronics Co. Ltd.
Last year, Apple sued Samsung for purportedly copying elements of its iPhone and iPad. Samsung countersued, and the international battle over mobile devices began, spawning several national and international lawsuits. Experts noted that Apple’s fight with Samsung was essentially a proxy battle against Google Inc. because Samsung’s products run on Google’s Android operating system.
A district court trial for one of the stateside lawsuits began in July. On Aug. 27, a jury found that Samsung had infringed six of Apple’s patents and ordered it to pay Apple $1.05 billion in damages, one of the largest intellectual property awards in history. Apple quickly requested injunctions against the sale of eight infringing Samsung products. A hearing is scheduled for Dec. 6.
But Samsung isn’t giving up its fight. The company announced in September that it would amend its existing U.S. patent lawsuits against Apple to include the new iPhone 5 as another product that infringes on its technology. Samsung also spread its animosity toward Apple on the airwaves when it launched an ad campaign in which it poked fun at diehard Apple consumers and touted the features of its own Galaxy S III smartphone.
Samsung also saw two courtroom victories in October. In the first, U.S. District Judge Lucy Koh had granted Apple a pretrial injunction against Samsung’s Galaxy Nexus smartphone in a separate patent suit after its August victory; but the Federal Circuit reversed the injunction, saying that Apple failed to prove that consumers purchased Samsung’s phone because of the technology that infringed on Apple’s patent. In the second victory, a three-judge panel in London’s High Court upheld an earlier judge’s ruling that Samsung’s tablets don’t infringe the design of the iPad.
4. Shameful Shipwreck
Just shy of the 100-year anniversary of the infamous Titanic shipwreck, history seemed to eerily repeat itself.
On Jan. 13, Captain Francesco Schettino of the Carnival Corp.-owned Italian cruise ship Costa Concordia steered his vessel too close to the shore of an Italian island and tore a hole in the hull of the ship, causing it to capsize. Amidst an unclear evacuation procedure, panic ensued. Many of the 4,200 people onboard fought to get onto lifeboats, and others opted to jump into the sea. The disaster left 32 people dead. Italian authorities charged Schettino with manslaughter, causing a shipwreck, abandoning ship, failing to report an accident to the coast guard and destroying a natural habitat. A trial was ongoing at press time.
In the wake of the catastrophe, experts speculated that Costa Concordia passengers wouldn’t be able to pursue litigation against Carnival in the U.S. because of a forum clause in their tickets stating that ticketholders must bring lawsuits in Genoa, Italy, where Carnival’s Italian business unit is located. Additionally, Carnival has maintained that its Italian unit is a separate corporate entity that it doesn’t manage on a day-to-day basis, and therefore all lawsuits concerning the crash should be filed in Italy.
But so far, that hasn’t deterred plaintiffs lawyers from filing suits against Carnival in the U.S. Hundreds of Costa Concordia passengers have sued Carnival for negligence and product liability. The cases, still pending, could eventually be consolidated under one judge.
In another case, more than 1,000 businesses located on the Italian island where the cruise ship capsized filed suit against Carnival for millions of dollars in damages, claiming the disaster discouraged visitors, polluted local waters and lowered property values. But on Oct. 1, a Florida district judge dismissed the suit and said an Italian court should hear the case as stipulated in the ship’s forum clause.
5. Devious Doug
The story sounds like a Hollywood crime thriller.
Thirty-three-year-old real-estate lawyer Douglas Arntsen lived in a modest, Staten Island, N.Y., home with his wife and young daughter. Since 2007, he had been working at Crowell & Moring and had a reputation for being quiet, friendly and hardworking.
But in September 2011, he unexpectedly quit his job. Oddly enough, his resignation coincided with Regal Real Estate’s discovery that millions of dollars were missing from an escrow account that Arntsen managed.
Arntsen admitted to Regal Real Estate’s managing partner that he had used some of the missing money and promised to get it back. He took the client to two different banks where he withdrew $2 million. He told the client the remainder of the money was in Hong Kong and that he should accompany him to retrieve it. Instead, the client alerted the police and planned to intercept Arntsen with them the next day at a scheduled meeting.
But Arntsen ditched the rendez vous and fled to Hong Kong alone. He was arrested upon his arrival.
As more details unfurled, authorities discovered Arntsen had stolen millions of dollars from other clients and had used the money for lavish meals, expensive sporting event tickets and strip clubs.
In the wake of Arntsen’s arrest, Crowell & Moring told InsideCounsel in December 2011 that it was “appalled to learn that a former employee seems to have been involved in an elaborate plot to defraud” his clients and colleagues. “The alleged conduct of this former employee is in stark contrast to everything we stand for,” the firm said.
Crowell & Moring settled a lawsuit with Regal Real Estate in December 2011, and in May, the firm announced that it had also settled suits with Aristone Realty Capital and BCN 16th St.
On Oct. 3, Arntsen pleaded guilty to three counts of grand larceny in the first degree and one count of scheming to defraud in the first degree. He faced between five and 15 years behind bars.
Two weeks later, Acting Manhattan Supreme Court Judge Jill Konviser sentenced Arntsen to between four and 12 years in prison. According to news reports, Arntsen tearfully apologized to his victims, former colleagues and family.
“I’m so sorry for what I did, for the money I took and I spent, for the trust that I squandered,” he said in a statement. “As much as I’ve dreaded this day, I’ve also longed for it. I am ready to take responsibility for my actions.”
6. Caring Criminal
Rajat Gupta was an unlikely corporate criminal. He grew up poor in India and was orphaned as a teenager, but he later found success on Wall Street as head of the global management consulting firm McKinsey & Co. and as a board member of Goldman Sachs Inc. and Procter & Gamble (P&G). He was a devoted family man and philanthropist.
But in March 2011, the Securities and Exchange Commission brought civil charges against Gupta claiming he leaked Goldman and P&G inside information to Raj Rajaratnam, the former Galleon Group founder who is currently serving 11 years in prison for insider trading. In October 2011, Gupta surrendered to the FBI, though he pleaded not guilty and asserted that the government’s evidence was circumstantial.
Gupta’s trial began in May and centered on wiretap evidence of conversations he had with Rajaratnam. On June 15, a federal jury in the Southern District of New York (SDNY) found Gupta guilty of one count of conspiracy and three counts of securities fraud. He faced a maximum sentence of 25 years in prison.
“Rajat Gupta once stood at the apex of the international business community. Today, he stands convicted of securities fraud,” Preet Bharara, U.S. attorney for the SDNY, said in a statement following the verdict. “He achieved remarkable success and stature, but he threw it all away.”
After Gupta’s conviction, 400 of his friends, family and prominent philanthropists—including Microsoft Corp. Chairman Bill Gates and former United Nations Secretary General Kofi Annan—wrote letters to U.S. District Judge Jed Rakoff beseeching him to be lenient when he sentenced Gupta. They noted that Gupta’s involvement in various humanitarian projects, including the Global Fund to Fight AIDS, Tuberculosis and Malaria, had improved the lives of millions of people.
On Oct. 24, Rakoff sentenced 63-year-old Gupta to two years behind bars and ordered him to pay a $5 million fine. Rakoff called his crimes “disgusting” but conceded that he had “never encountered a defendant whose past history suggests such an extraordinary devotion … to people in need.”
Gupta will report to prison on Jan. 8, 2013.
7. Super Settlement
The largest antitrust settlement ever is on the fast-track to making history.
Visa Inc., MasterCard Inc. and more than a dozen of the nation’s largest banks agreed to the $7.2 billion whopper of a deal in July, hoping to put to bed retailers’ allegations that they had fixed credit and debit card fees. The charges in question, known as “swipe fees” or “interchange fees,” cost retailers 2 percent or more every time a customer purchased something with a credit or debit card.
According to the terms of the settlement, the credit card companies and banks would pay $6 billion directly to the class of retailers and reduce the swipe fees by the remaining $1.2 billion for eight months.
This was not good enough for some merchants, including Wal-Mart, Target and the National Association of Convenience Stores, which quickly voiced their opposition. The objections came mainly from the fact that the settlement would allow Visa, MasterCard and the banks to raise the fees again in the future, and that the deal released the companies from further antitrust litigation.
“[The settlement] would not structurally change the broken market or prohibit credit card networks from continually increasing hidden swipe fees, which already cost consumers tens of billions of dollars each year,” Wal-Mart said in a statement.
Even in the face of this resistance, the settlement continued to chug along. U.S. District Judge John Gleeson put the deal on an expedited schedule, giving its opponents until Oct. 31 to file written objections before a hearing on Nov. 9, when the deal received preliminary approval.
Whether or not Gleeson grants final approval to the settlement, the $1.2 billion reduction in swipe fees will take effect after class members have been given the time to opt out of receiving monetary damages.
8. Social Media Snafus
Corporate social media policies designed to protect proprietary and confidential information from turning up on Facebook or Twitter became a source of friction between employers and the National Labor Relations Board (NLRB).
At issue is whether the policies violate employees’ rights, under Section 7 of the National Labor Relations Act (NLRA), to communicate or work together in “concerted activities” for the purpose of collective bargaining or to improve working conditions and terms of employment. Employers in both union and nonunion workplaces who terminate or discipline an employee based on a social media posting found to be “protected concerted activity”—such as a Facebook conversation among employees complaining about pay—may violate Section 7.
NLRB Acting General Counsel Lafe Solomon on May 30 provided a detailed analysis of six social media policies he found to be unlawful. For example, Solomon cited General Motors’ policy warning employees not to “reveal non-public company information,” defined as including “any topic related to the financial performance of the company”; “information that has not already been disclosed by authorized persons in a public forum”; and “personal information about another employee, such as … performance, compensation or status in the company.”
“This shows companies are not immune on the basis of size or unionization from being dinged by the board,” James Walters, a partner at Fisher & Phillips, told InsideCounsel in August. “GM has a lot of lawyers. If they can’t pass the sniff test with the NLRB, who can?”
In September, the NLRB issued its first two decisions involving social media. On Sept. 7, the board held that Costco Wholesale Corp.’s employee handbook policies covering electronic communications violated the NLRA, including prohibiting employees from electronically posting statements that “damage the Company, defame any individual or damage any person’s reputation.” On Sept. 28, the NLRB held that an auto dealership’s rule encouraging “courtesy” in communications with customers and other employees violated the NLRA, but it upheld the dealership’s discharge of an employee for a Facebook posting unrelated to the terms and conditions of his employment.
9. Claiming Domains
The Internet is an ever-changing, everevolving beast, and companies can be hard-pressed to keep up with new developments. The latest facelift affecting companies is the expansion of generic top-level domains (gTLDs), the end portions of website names—.com, .net and .org being the most prominent.
The Internet Corporation for Assigned Names and Numbers (ICANN) created the possibility for .anything when it began accepting applications for new gTLDs on Jan. 12. Not surprisingly, a bit of a feeding frenzy ensued, with companies scrambling to apply for domain names for marketing purposes or to prevent others from snatching up their brand names.
Some of the domain names that applicants are seeking make perfect sense. An adult entertainment company wants .sex, .porn and .adult. Google wants .lol. Others are a little more out there, such as .sucks, .vodka and .horse. Once the dust settled, ICANN had more than 1,900 applications to review and is, according to an InsideCounsel.com column by Loeb & Loeb Partner Daniel Frohling and Associate Jessica Lee, “by its own account, already at least six months behind schedule.”
ICANN recently extended the deadline for filing formal objections to March 13, 2013. It expects to publish the results of application evaluations the following June or July. Despite the long road ahead, Frohling and Lee recommend that companies keep tabs on applications that are of interest to them and consider whether they have grounds for a formal objection against other companies’ applications that could affect their business.
“The advice of counsel or other industry experts who have reviewed and analyzed the applications and are familiar with the processes that ICANN has proposed or implemented may prove valuable here,” Frohling and Lee wrote.
Companies may well need the advice of an expert to guide them through this process, as a survey shows many trademark attorneys are woefully unprepared to deal with the gTLD expansion. Melbourne IT Digital Brand Services’ June study revealed that 54 percent of trademark attorneys surveyed thought the new domain names posed a moderate to high risk to their clients, but only 36 percent of them had read the gTLD Application Guidebook.
10. Promoting Predictive Coding
The tidal wave of digital data that companies have to preserve and review when faced with litigation can be daunting. Technology-assisted review software can aid exhausted attorneys in sifting through the data deluge. One such software is predictive coding, which takes a human-sorted sample of relevant documents and uses it to predict relevancy across the entire collection of files.
On Feb. 24, predictive coding received a thumbs up from the bench when Judge Andrew Peck endorsed the technology in his decision in Da Silva Moore v. Publicis Groupe. The parties in this gender discrimination case initially agreed to use predictive coding as part of their e-discovery protocol, and Peck took the opportunity to officially state that it can be an appropriate tool, providing that it is tested for quality control, as any other form of document review would be.
“If you show you’ve got nothing to hide, a judge is going to give you the benefit of the doubt if you’re trying to employ creative means and tools to reduce the [electronically stored information] blob,” Cozen O’Connor Member Dave Walton told InsideCounsel in May.
However, in April, the plaintiffs changed their minds, arguing that Peck’s enthusiasm for predictive coding amounts to partiality. Peck refused to recuse himself when they asked him to and stayed discovery, leaving the case in limbo as of press time.
While this was going on, another case related to predictive coding grabbed the public’s attention: Kleen Products v. Packaging Corp. of America. In this antitrust dispute, the plaintiffs requested that the defendants redo their document production using predictive coding, even though they had already spent thousands of hours producing documents with keyword search tools. The plaintiffs argued that predictive coding would provide more thorough, accurate results.
Judge Nan Nolan asked the parties to reach a compromise, and said that unless a party can show that document production results are inaccurate or insufficient, it “cannot dictate what technology [its] opponent may use,” Robins, Kaplan, Miller & Ciresi Partner Jan Conlin and Attorney Andrew Pieper wrote in a column for InsideCounsel.com. On Aug. 21, the plaintiffs withdrew their demand.
These cases show that predictive coding has grabbed more than just a foothold in the legal industry—it has grabbed the attention of the courts, lending it an air of legitimacy as an e-discovery tool. We can only expect to see more of it from here on out.
11. Immigration Preemption
When the Supreme Court reaffirmed the federal government’s right to control immigration policy and enforcement on June 25, it was welcome news for multistate employers. The decision put an end to many state efforts to regulate immigration, thereby precluding the need for employers to comply with a patchwork of differing laws.
The 5-3 decision in Arizona v. United States struck down three of four contested provisions of Arizona’s 2010 immigration law designed to pressure illegal immigrants to return to their homelands. Although the law was aimed at immigrant workers rather than their employers, one section made it a crime for an unauthorized worker to apply for work or be employed in the state, a provision the court found to be preempted by federal law.
In the majority opinion, Justice Anthony Kennedy explained that the Immigration Reform and Control Act of 1986 (IRCA) already requires aliens to register with the federal government and to carry proof of status, mandates that employers verify prospective employees’ employment authorization status and imposes sanctions on employers who hire unauthorized workers. But IRCA does not impose criminal penalties on employees. Although the Arizona provision and IRCA share a common goal of deterring unlawful employment, the state law has a conflicting method of enforcement, he concluded.
The court’s reiteration of the supremacy of federal law in immigration enforcement was reassuring to multistate employers, which had watched five states pass laws similar to Arizona’s, while others were poised to enact their own legislation.
“The high court has sent the powerful and necessary message that states should refrain from legislating in this area,” Sean Hanagan, a Jackson Lewis partner, told InsideCounsel in August. “Employers can breathe a bit easier with the implication from this ruling that the growing trend of a patchwork of different state immigration laws may finally abate.”
12. Gay Rights Gains
For lesbian, gay, bisexual and transgender (LGBT) individuals fighting for their rights, 2012 was a banner year.
President Obama made headlines in May when he embraced the concept of gay marriage. Although it was largely symbolic, the president’s statement was an indication that the concept of LGBT rights, including gay marriage, is rapidly gaining support.
On the legal front, both the 1st and 2nd Circuits found unconstitutional the 1996 Defense of Marriage Act’s definition of marriage as the union of a man and a woman, which made it illegal for same-sex couples to wed and receive federal benefits. The issue is expected to go to the Supreme Court.
Although some corporations including Starbucks, Amazon and Nordstrom courted LGBT customers by publically endorsing gay marriage, the Chick-fil-A restaurant chain faced protests over the summer when its president said he opposed it. An ensuing boycott ultimately resulted in the chain pledging to halt contributions to anti-gay groups.
But of more immediate importance to employers than gay marriage was the Equal Employment Opportunity Commission’s (EEOC) groundbreaking finding that discrimination based on gender identity is illegal under Title VII.
The April 20 ruling in the case of a job applicant rejected when she revealed she was undergoing a gender transition marked a sharp policy shift for the agency. In Macy v. Bureau of Alcohol, Tobacco, Firearms and Explosives, the EEOC expressly overturned prior decisions that found claims of discrimination based on gender identity or transgender status not actionable under Title VII. The EEOC will now accept complaints of workplace discrimination from transgender employees. Although Macy involved a government agency, it is expected to impact private employers as well.
“The writing is on the wall, not only for public but also for private employers. This is a new enforcement area the EEOC will undertake,” Denise Visconti, a Littler Mendelson shareholder, told InsideCounsel in July.
13. Settled Up
Summer 2012 was a high season for big settlements in the pharmaceutical industry.
In July, GlaxoSmithKline (GSK) finalized a settlement agreement to pay $3 billion to resolve criminal and civil charges related to the off-label marketing of some of its top-selling drugs, as well as accusations that it defrauded Medicaid. The payment is the highest ever by a drug company and represents the largest health care fraud settlement in U.S. history, breaking the record set in 2009 by Pfizer’s $2.3 billion off-label marketing settlement.
GSK also agreed to enter into a five-year Corporate Integrity Agreement. “This is absolutely the most comprehensive and far-reaching Corporate Integrity Agreement that’s been entered to date,” Gary Messplay, co-chair of Hunton & Williams’ food and drug practice group, told InsideCounsel in September.
GSK had pleaded guilty to misbranding Paxil and Wellbutrin by promoting them for off-label use, for which the company agreed to pay a $757.4 million fine. GSK will also pay $242.6 million for failing to report safety data for Avandia to the Food & Drug Administration. Although the company admitted no liability on the civil side, it will pay the remainder of its fine for off-label promotion of several of its other drugs, as well as offering kickbacks to health care professionals to promote and prescribe certain drugs.
In a similar case, Johnson & Johnson (J&J) was also able to end some of the litigation surrounding its antipsychotic drugs, Risperdal and Invega. In August, J&J announced it would pay $181 million to settle accusations with 36 U.S. states and the District of Columbia that it marketed Risperdal and Invega for unapproved uses.
The deal ended one chapter of a prolonged saga concerning J&J’s drug marketing practices between 1998 and 2004. According to state and federal officials, the company and its Janssen Pharmaceuticals Inc. subsidiary marketed Risperdal and Invega, designed to treat schizophrenia, as a remedy for bipolar disorder, dementia and mood and anxiety disorders.
The J&J settlement is the largest multistate consumer protection-based pharmaceutical settlement in history, according to New York Attorney General Eric Schneiderman. “This landmark settlement holds the companies accountable for practices that put patients in danger, and serves as a warning to other pharmaceutical giants that they must play by one set of rules,” Schneiderman said in a statement. J&J admitted no liability in the settlement.
14. Bribery Bust
In April, the New York Times dropped a bomb on Wal-Mart when it published an article not only accusing the company’s Mexican unit of breaking the law, but also accusing Wal-Mart of making a valiant effort to cover it up.
According to the article, “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle,” Wal-Mart de Mexico engaged in criminal activity to expedite its expansion in Mexico by paying bribes to the country’s officials. The allegations first arose in 2005, when a senior lawyer at Wal-Mart received an email from a former Wal-Mart de Mexico executive claiming the company engaged in rampant Foreign Corrupt Practices Act (FCPA) violations in an effort to win market dominance. The investigation that immediately followed uncovered a long trail of potentially illegal payments totaling more than $24 million.
Although lead investigators recommended the company’s next step was to broaden the investigation, Wal-Mart shut it down. According to the article, the company didn’t notify American or Mexican law enforcement officials, it didn’t reprimand any of the executives involved in the potentially illegal activity, and it went on to promote one executive who was named as the driving force behind the corruption to vice chair several years later.
Since the story broke, however, Wal-Mart has been hard at work cleaning up the mess. The following week, it announced that it appointed a global officer to oversee its compliance with the FCPA. And in October, it announced that it had created the position of international compliance chief.
“Walmart is committed to having strong and effective compliance programs around the world,” Wal-Mart spokesman David Tovar told the Wall Street Journal in October. “Over the past 18 months, we have made improvements to our global compliance programs and have taken a number of specific, concrete actions with respect to our processes, procedures and people. Today’s announcement is consistent with our ongoing efforts.”
15. Dewey's Demise
The bankruptcy of storied New York law firm Dewey & LeBoeuf made legal headlines for much of the year. Public rumblings of trouble began in early 2012, when individual partners and entire teams of attorneys began to defect from the firm. The departures were reportedly motivated by financial problems, including a compensation system that provided substantial guaranteed bonuses to rainmakers at the expense of more junior partners.
On March 2, Dewey’s chairman Steven Davis acknowledged that the firm was reducing the number of employees, but maintained that the layoffs were simply “proactive steps” to strengthen the firm. But those reassurances—and a subsequent overhaul of Dewey’s management team— did little to stem the tide of departures. Davis himself was ousted from the firm in April, later becoming the target of a federal investigation reportedly related to the firm’s collapse. Finally, after eleventh-hour merger talks fell through, Dewey filed for Chapter 11 bankruptcy protection on May 28.
To repay its debts, which some reports have put as high as $500 million, the team overseeing Dewey’s liquidation quickly moved to reach a “clawback” settlement with ex-partners. Under the terms of the deal, the partners would repay portions of their compensation to receive immunity from future lawsuits related to the bankruptcy. Although many former employees initially argued that the deal favored highly paid attorneys and shielded the firm’s management from liability, roughly 400 of the firm’s 670 partners ultimately signed on to a revised version of the settlement.
The settlement’s approval hasn’t ended Dewey’s saga, however. In addition to the investigation into Davis, the firm and its management are facing lawsuits from several other parties, including former partners who claim Dewey hid its precarious financial condition from current and prospective employees.
As of press time, Dewey’s estate was expected to file a final reorganization plan in November.
16. Obamacare Upheld
In a decision with major implications for employers, the Supreme Court voted 5-4 on June 28 to uphold the key provisions of President Obama’s controversial health care law, saying its requirement that most Americans obtain insurance or pay a penalty was authorized by Congress’ power to levy taxes. Chief Justice John Roberts joined the court’s four more liberal members in allowing the overhaul of America’s health care system outlined in the Patient Protection and Affordable Care Act (PPACA) to proceed.
While focused on the so-called “individual mandate,” the decision meant that PPACA provisions aimed at employers also remain intact. Some of those, including allowing parents to cover their young adult children on their health care plans until age 26, are already in effect, and others, including a requirement that employers report the aggregate cost of provided coverage on W-2 forms, start in 2013.
But the biggest impact comes in 2014, when employers with more than 50 employees must either “pay or play.” They can play by offering their employees affordable employer-sponsored health care, or they can pay a penalty.
A General Accounting Office review of 19 employer surveys on the topic found the percentage of employers who said they planned to drop coverage ranged from 2 percent to 20 percent, with many studies indicating the smaller the employer, the greater the chance of abandoning coverage.
“Even if they are considering it, no [large employer] wants to be the first one,” Steven Friedman, a Littler Mendelson shareholder, told InsideCounsel in November. “There may be a cat-and-mouse game going on, where employers in certain industries are waiting for the first company to drop coverage, or waiting for it to become commonplace.”
Despite the looming deadlines, some employers awaited the results of the November election before deciding how they would proceed.
President Obama’s re-election victory assures that the law will take effect, although Congress may modify some provisions that are generally viewed as problematic. So those employers who delayed have only a short time to make the pay-or-play decision, with significant implications on cost and competitiveness.
17. Sorry State
For the Pennsylvania State University, 2012 will long be remembered as the year the once highly respected school fell from grace.
In late 2011, news broke that some of the university’s most respected officials had ignored and covered up an ongoing child sexual abuse scandal within Penn State’s celebrated football program. The fallout of the investigation resulted in the ousting of famed head football coach Joe Paterno as well as the university’s president, Graham Spanier, and other top officials; a $60 million fine imposed by the National Collegiate Athletic Association against the university; and most importantly, the arrest, trial and sentencing of serial child molester and former assistant football coach Jerry Sandusky, who is now serving 30 to 60 years in prison for his actions.
But the litigation around the case is far from over. Some of Sandusky’s victims have either already filed suit against the university or plan to. And Mike McQueary, the school’s former assistant football coach who blew the whistle on the scandal, filed suit against Penn State in October for $8 million, claiming the school violated his whistleblower rights, and that he was defamed and misrepresented.
Penn State’s general counsel was far from immune to the scandal’s wrath. In July, a report conducted by former FBI Director Louis Freeh, who is now a partner at Freeh Sporkin & Sullivan, criticized the role then-GC Cynthia Baldwin played in the child sex abuse investigation. Among other criticisms, Freeh’s report said Baldwin never briefed the Penn State board about the grand jury investigation or the risk to the university and that she advised university personnel in spring 2011 that, due to his emeritus status, Sandusky could not be denied access to Penn State facilities or be terminated because he had not been convicted of a crime. Baldwin resigned from her post as Penn State GC in January—six months before the report was released.
“[This case has] people—and not just lawyers—talking about what to do if confronted with a situation like that,” Chad Shultz, a partner at the labor and employment firm Ford & Harrison, told InsideCounsel in January. “It forces them to go through the thought process. Hopefully the next person who faces something like this, even if it’s a less egregious situation, will be better equipped to react appropriately.”
18. On the Move
Every year brings news of high-profile general counsel leaving for other positions or retiring, but the past year saw some especially notable moves.
In late 2011, Starbucks General Counsel Paula Boggs announced she would be leaving the coffee retailer after eight years at the helm of the legal department. Boggs—who had been practicing law in the government, private and in-house sectors since 1984—decided to join President Barack Obama in his reelection campaign. Working with the president was familiar territory for Boggs. In 2010, he had appointed her to the White House Council for Community Solutions, which works on community- developed solutions for youth development, education and employment.
Around the same time, another high-profile GC parted ways with his legal department. After four years as executive vice president, general counsel and secretary of Hewlett-Packard Co., Michael Holston left his post to pursue other opportunities. “Mike has been an exceptional leader at HP and a great contributor to the company’s mission,” HP President and CEO Meg Whitman said in a statement at the time. “The entire company wishes him well in his future endeavors.” Before joining HP, Holston was a litigation partner at Morgan Lewis.
Also in December 2011, Geoffrey Kelly, GC of The Coca-Cola Co., announced his retirement after four decades with the company. Kelly started in Coke’s legal department in 1970 and worked his way up the ranks, becoming senior vice president and general counsel in 2005. “Geoff’s deep experience across the operations of the company combined with his passion for our business and his people have made him invaluable in leading the Legal function,” said Muhtar Kent, Coke’s chairman and CEO.
Longtime GC and advocate for diversity Michele Coleman Mayes announced she would be retiring from her position in the top legal spot at The Allstate Corp. in June. During her nearly five-year career at Allstate, Mayes worked on legal and regulatory matters, as well as public policy and corporate governance. Previously, she was GC at Pitney Bowes and had worked in private practice. In August, Mayes joined the New York Public Library as general counsel.
19. Whistleblower Windfall
The Securities and Exchange Commission (SEC) in August issued the first payment under the Dodd-Frank Wall Street Reform and Consumer Protection Act whistleblower program, which took effect one year earlier amid concerns it would spark a firestorm of whistleblower reports.
The agency awarded $50,000 to an unnamed whistleblower for information about a multimillion-dollar securities fraud scheme that led to a court ordering more than $1 million in sanctions. The award is 30 percent of the sum the SEC had collected from the unnamed defendants—the maximum payout allowed under the whistleblower program.
Dodd-Frank created a powerful incentive for those reporting violations of securities laws and the Foreign Corrupt Practices Act, offering whistleblowers between 10 percent and 30 percent of any recovery of more than $1 million in penalties. An intense campaign by the Association of Corporate Counsel and other business groups to have the rules require employees to report wrongdoing internally before going to the SEC failed. Instead, the rules say that one factor that weighs in favor of a higher award is whether the whistleblower used internal compliance processes. Conversely, a whistleblower who interfered with such processes may receive a lower award.
Since the program’s inception, the SEC has received an average of eight whistleblower reports per day, and the August payout is expected to be followed by many more.
“The payout of this first award, albeit a modest sum, encourages future bounty hunters because it shows that the money is there for quality information,” Ed Ellis, co-chair of Littler Mendelson’s Whistleblowing & Retaliation Practice, told InsideCounsel in August. “We are likely to see additional and larger bounties issued in the near term as the SEC has hundreds of whistleblower cases with settlements in excess of $1 million in the pipeline. The big question for business is whether modern compliance systems are able to detect and remedy misconduct before it goes to the government.”
John West, a partner at Troutman Sanders, recommends periodic independent compliance audits of programs or divisions to identify weaknesses and help create a culture where employees will report their concerns internally instead of contacting the SEC.
“[Audits] will demonstrate to employees that the company takes compliance seriously enough to open up its activities to an independent party who will provide an objective report on compliance within the area being examined,” he told InsideCounsel in April. “By saying to employees, ‘Here is what we identified, here is what we fixed,’ they see the commitment to compliance is more than saying good words.”
20. Patent Problems
To patent or not to patent: That is the question several courts have been going back and forth on for the past two years—particularly with regard to the patentability of genes.
In August, the Federal Circuit held in Association For Molecular Pathology v. U.S. Patent and Trademark Office that human DNA can be patented, reaffirming its earlier decision in the case and rejecting again the contention that human DNA is an unpatentable product of nature.
The circuit first ruled on Association For Molecular Pathology in 2011, but the Supreme Court asked it to reconsider its decision in light of the high court’s recent ruling in Mayo Collaborative Services v. Prometheus Laboratories. Mayo invalidated patents on evaluating a patient’s response to a drug.
The Federal Circuit’s latest decision is a victory for the biotech industry. “Patent protection is crucial to maintaining investment in [biotech] R&D,” Gregory Castanias, a partner at Jones Day, told InsideCounsel in November.
But not everyone sees it that way. Soon after the Federal Circuit reaffirmed its earlier decision, the American Civil Liberties Union (ACLU) spoke up.
“In our view, the court of appeals did not fully consider or correctly apply the Supreme Court’s most recent and relevant patent law decisions,” Chris Hansen, a staff attorney with the ACLU Speech, Privacy and Technology Project, said in a statement. “DNA occurs naturally in the human body and cannot be patented by a single company that can then use its patents to limit scientific research and the free exchange of ideas.”
In September, the ACLU called upon the Supreme Court to hear the case and essentially invalidate gene patents. At press time, the high court had not yet responded to the ACLU’s request, but it’s fair to say this question of gene patentability is far from resolved.