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Pepper Hamilton, L.L.P.

Federal Agencies Propose Additional Regulations for Identity Theft & Address Discrepancies
The federal financial institution regulatory agencies - including the Federal Reserve, FDIC, OCC, OTS and NCUA - and the Federal Trade Commission (Agencies) are requesting comments on a Notice of Proposed Rulemaking (NPRM) that would implement sections 114 and 315 of the Fair and Accurate Credit Transactions Act of 2003 concerning identity theft and address discrepancies.

The Agencies are jointly proposing regulations that would require each financial institution and creditor to develop and implement an identity theft prevention program that includes policies and procedures for detecting, preventing and mitigating identity theft in connection with account openings and existing accounts. As part of its program, a financial institution or creditor may use its existing customer identification program (CIP) to verify the identity of a person opening an account. Under the proposed regulations, the program must include policies and procedures for detecting any possible risk of identity theft relevant to its operations and implement a mitigation strategy appropriate for the level of risk.

The proposed regulations include guidelines listing patterns, practices and specific forms of activity that constitute “red flags” - which signal a possible risk of identity theft. To identify relevant red flags, the financial institution or creditor must consider (a) which of its accounts are subject to a risk of identity theft, (b) the methods it provides to open and access these accounts, and (c) its size, location and customer base. For example, the financial institution or creditor must assess whether it will identify red flags in connection with extensions of credit only, or include other types of relationships within the scope of its program, such as deposit relationships and whether to include small business customers as well as individuals.

The proposed regulations incorporate a flexible, risk-based approach similar to that used in the Information Security Standards issues under section 501(b) of the Gramm-Leach-Bliley Act. Accordingly, the program should be appropriate to the size and complexity of the financial institution or creditor, and the nature and scope of its activities. In light of this feature, the Agencies recommend that financial institutions consider combining the program with existing information security programs, even though the program applies to a broader range of people. Critical elements of the program also include staff training, oversight of service provider arrangements, and involvement of the board of directors and senior management.

The proposed regulations would require credit and debit card issuers to develop policies and procedures to assess the validity of a change of address request that is followed closely by a request for an additional or replacement card. Under these circumstances, the card issuer may not issue an additional or replacement card unless it first assesses the request’s validity by notifying the cardholder or using other reasonable means of verification.

Additional proposed regulations would require users of consumer reports to develop reasonable policies and procedures that must be applied when a notice of address discrepancy is received from a consumer reporting agency. These policies and procedures should enable users to verify the person’s identity, and reconcile the address discrepancy, if the user establishes a continuing relationship with the consumer. Under this proposal, a user may employ its existing CIP procedures to verify the identity of the consumer.

Comments on the NPRM are due no later than 60 days after publication in the Federal Register, which is expected shortly.

07-21-2006

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Fredrikson & Byron, P.A.

Delaware Supreme Court Affirms Favorable Outcome for Disney Directors in Ovitz Termination Case
On June 8, 2006, the Delaware Supreme Court issued its highly anticipated decision affirming the 2005 ruling of the Delaware Chancery Court that the directors of The Walt Disney Company did not breach their fiduciary duties in connection with the employment and termination of Michael Ovitz as President of Disney. In re the Walt Disney Co. Deriv. Litig., No. 411,2005 (June 8, 2006). Although Ovitz’s brief employment of 14 months at Disney resulted in the payment of over $130 million to Ovitz as a “no-fault” termination fee, the Court maintained the basic notion that directors of a Delaware corporation will be given significant deference in managing corporate affairs and making business judgments (this is known as the “business judgment rule”), even when such actions fall “significantly short of the best practices ideal of corporate governance.”

The Delaware Supreme Court re-affirmed the lower court’s decision in every respect, declining the opportunity to change Delaware fiduciary duty standards in a significant way. This came as a surprise to many who believed that the Court would use this opportunity to establish a higher standard of conduct for directors, especially in light of recent media and legislative attention focused on executive conduct and compensation. Nonetheless, while the decision did not deviate from the basic established principles of the business judgment rule, the Court’s decision is instructive in several significant respects:

The Duty of Good Faith

Traditionally, directors are thought to have two main duties, the duty of care (i.e. the obligation to exercise the same care that an ordinary, prudent person would exercise in a like position or under similar circumstances) and the duty of loyalty (i.e. the duty not to make self-interested decisions which conflict with the interests of the corporation and its stockholders). In the Disney decision, the Court made clear that there is also a duty of good faith, that is separate from, although intertwined with, the duties of care and loyalty. It commented that the requirement of good faith had been “relatively uncharted” and that it wanted to provide some “conceptual guidance to the corporate community” on the meaning of this requirement. The Court identified three different categories of conduct in making determinations of good faith:

Subjective Bad Faith – This is extreme conduct where a director (considered a “fiduciary”) acts with actual intent to do harm. The Court did not expand on this much further, stating that it “borders on axiomatic” that such conduct obviously constitutes a failure to act in good faith.
Gross Negligence – At the other end of the spectrum, this represents fiduciary action that is grossly negligent, but that is not motivated by an “malevolent intent.” The Court clearly stated that gross negligence (including a failure to inform oneself of all of the available facts), while a violation of the duty of care, without more, does not constitute bad faith. This distinction is consistent Delaware’s statutory protections for directors, under which Delaware corporations may exculpate and indemnify directors who have been grossly negligent (i.e. who have breached the duty of care), but not those who have breached the duty to act in good faith.
The Middle Ground - The Court cited a need for a “doctrinal vehicle” to analyze fiduciary action that falls between the above two categories. This is conduct that is not motivated by an actual intent to do harm, but is more culpable than gross negligence, because it involves an “intentional dereliction of duty [and] a conscious disregard for one’s responsibilities.” Such reckless conduct, in the Court’s opinion, violates the duty to act in good faith, which is also consistent with Delaware’s statutory treatment of this “intermediate category of misconduct” as non-exculpable and non-indemnifiable.
The Court declined to provide a list of acts that would violate the duty of good faith, but expressed that, notwithstanding the protection fiduciaries have with respect to negligent behavior, behavior motivated by an intent to cause harm, reckless judgments, and a complete disregard in a specific instance for one’s duties as a director, will not be protected.

Best Practices For Determining Executive Compensation

Although the Court established that the business judgment rule is not akin to an obligation to use “best practices,” the Court did provide some helpful tips as to what “best practices” for approving senior executive employment agreements might be. The Court also clarified that Delaware corporate law “expressly empowers a board of directors to appoint committees and to delegate to them a broad range of responsibilities,” which may include determining executive compensation. The following are examples from the Disney case of practices the compensation committee could have engaged in to improve the decision-making process regarding Ovitz’s compensation:

The committee should have received a spreadsheet prepared by or with the advice of an expert, indicating the amount the executive would receive under each circumstance provided for in the employment agreement (e.g. if the executive is terminated for particular causes, if the executive is terminated for no cause, if the executive voluntarily terminates employment, etc . . . ).
The terms of employment and termination should have been explained by an expert or by a knowledgeable committee member, and the spreadsheet should have been filed with the minutes of the meeting for future reference.
The compensation committee did not necessarily have to review the employment contract itself, as long as the members were aware of the key contractual terms and their implications, had received information from a compensation expert, and had consulted with at least one person who was involved in negotiating the contract.
Questions of Authority of the Board and the CEO

In deciding the issue of whether the Board or the CEO, Michael Eisner, had the authority to terminate Ovitz without cause, thereby triggering the large severance payment under his contract, the Court looked at Disney’s governing documents, including the Certificate of Incorporation and Bylaws. The Court found that Disney’s governing instruments were ambiguous, and thus used a contract-interpretation method, namely reliance on extrinsic evidence, to determine the intent of the parties. After an examination of the extrinsic evidence, the Court determined that the both the Board and the CEO had the unilateral power to terminate Ovitz, and therefore, Eisner’s termination of Ovitz did not violate any of the directors’ fiduciary duties. The Court suggested, however, that for the avoidance of doubt, a better practice would be to clearly delineate each party’s authority to make decisions with respect to material matters in the governing documents themselves.

Overall Lessons from the Disney Decision

The business judgment rule still protects the business decisions of fiduciaries of Delaware corporations. It is does not require that fiduciaries act perfectly, but does require that directors and officers observe appropriate process, be well-informed, be well-advised, and keep the best interests of the corporation and its stockholders in mind at all times in their decision-making. In order to show that directors and officers should be afforded the protections of the business judgment rule, PROCESS IS KEY. Processes should be implemented to ensure and document that directors and officers are informed of material facts, have procured any necessary advice, and then have the opportunity to discuss and analyze the facts and advice in reaching their decision. Some practical suggestions follow:

Decide which decisions should be made by the board of directors, which can be delegated to a committee, and which may be made by an officer(s) of the company, and make sure this is clearly documented in the company’s governing instruments.
Relevant materials should be received sufficiently in advance of meetings, and directors, officers and committee members should review the materials ahead of time and ask for more information if necessary.
Decision-makers should be encouraged to ask questions and to engage in a free dialogue about the decision at hand.
Accurate and appropriately thorough minutes of all meetings should be kept and should include references to, or attachments of, reports, spreadsheets, and other data relied upon to make decisions.
Companies should engage outside experts and independent counsel when appropriate and make sure that such opinions are properly communicated to the decision-makers.
Companies should determine the circumstances under which they will exculpate directors and indemnify directors and officers, make sure that such policies are permissible under applicable laws, and then take steps to obtain and maintain proper D&O insurance coverage.

07-21-2006

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Vorys, Sater, Seymour & Pease LLP

Vorys Adds Media Law Attorney to its Cincinnati Office
The law firm of Vorys, Sater, Seymour and Pease LLP proudly announces that Maureen P. Haney is now an associate in the Cincinnati office practicing in the Litigation Group.

Prior to joining Vorys, Ms. Haney worked as a senior associate at Frost Brown Todd in Cincinnati. She has experience with all aspects of commercial and business litigation, including fraud, breach of contract/warranty, deceptive trade practices and anti-trust claims, as well as Uniform Commercial Code matters, false advertising and internet-based disputes.

Ms. Haney also has extensive experience in media, communications and advertising law, and has litigated a number of high-profile First Amendment cases. She has handled all varieties of public records issues, has successfully defended numerous radio and television stations in defamation and invasion of privacy actions, and has performed countless prebroadcast/prepublication reviews. She also has extensive experience with appeals in both state and federal courts.

Ms. Haney is licensed to practice law in Ohio state courts, the Sixth Circuit Court of Appeals and the U.S. District Courts for the Northern and Southern Districts of Ohio.

Celebrating 98 years in 2006, Vorys, Sater, Seymour and Pease LLP has offices in Cincinnati, Columbus, Cleveland, and Akron, Ohio, as well as in Washington, D.C., and Alexandria, Va. With nearly 400 attorneys, Vorys is one of the largest law firms in the United States. For more information about the firm, visit www.vssp.com.

07-21-2006

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Ober & Kaler, P.C.

Health Care Lawyer John Lessner Named to CASA Baltimore Board
Charles Village resident John F. Lessner has been named president of the Court Appointed Special Advocate (CASA) of Baltimore’s board of directors.

Established in 1988, CASA of Baltimore provides a voice for children involved in the juvenile court system, ensuring that abused and neglected children are placed in safe, permanent homes and that consideration is given to their educational, medical and social service needs.

CASA served over 200 children last year and under Mr. Lessner’s leadership, the organization plans to increase capacity to serve sixty additional children.

A principal in the Baltimore office of law firm Ober|Kaler, Mr. Lessner practices Health Law and focuses on regulatory matters involving Medicare/Medicaid issues and state licensure. He advises clients on Medicare/Medicaid cost reimbursement issues, conditions of participation, certification, privacy, e-health, advance directive and freedom of choice issues in institutional settings.

Mr. Lessner is a graduate of the University of Maryland School of Law (J.D., 1993) and The Johns Hopkins University (B.A., 1983). He is an active member of the American Health Lawyers Association and the Maryland State Bar Association.

07-21-2006

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Hahn, Loeser & Parks, L.L.P.

Steve Chappelear gives a personal account about his decision to switch firms as a partner in,"Diverse Work Opportunities are Key to Retaining Attorneys as Trend of Switching Firms Grows"
Steve Chappelear gives a personal account about his decision to switch firms as a partner in,""Diverse Work Opportunities are Key to Retaining Attorneys as Trend of Switching Firms Grows""

The Daily Reporter
A growing trend among attorneys is transferring from one large firm to another, making lateral moves in favor of new challenges and greater opportunities. Steve Chappelear discusses the reasons behind his decision to leave Kegler, Brown, Hill and Ritter LPA after 25 years to join Hahn Loeser.

07-21-2006

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Saul Ewing, LLP

SUZANNE S. MAYES APPOINTED TO HOUSE OF DELEGATES
Suzanne S. Mayes, a Partner in Saul Ewings Public Finance Department, has been appointed to the Pennsylvania Bar Association House of Delegates as a voting member.

The House of Delegates was established in 1966 and is charged with setting the policy of the Pennsylvania Bar Association.

Ms. Mayes concentrates her practice in municipal finance and project finance law, including projects involving economic development, single, multi-family and senior housing, transportation, government, and education.

Ms. Mayes graduated from Fairfield University, summa cum laude, and received her J.D. degree, magna cum laude, from the University of Pennsylvania School of Law.

07-21-2006

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Snell & Wilmer, L.L.P.

LAWDRAGON NAMES KETAN VAKIL TO “500 NEW STARS, NEW WORLDS” LIST
Ketan Vakil, a partner in the intellectual property practice at the Orange County office of Snell & Wilmer, has been named in the 2006 edition of Lawdragon magazine’s “500 New Stars, New Worlds” list. Selected through extensive research and confidential votes, the Lawdragon 500 is a comprehensive legal list of leading attorneys in the country.

Experienced in the topic of outsourcing intellectual property overseas and other practice related topics, Vakil’s focus at Snell & Wilmer includes intellectual property protection, litigation, counseling and licensing, including the procurement and litigation of patents, trademarks, copyrights and trade secrets.

This post adds to the list of industry honors received by Vakil, including his recent nomination as a 2006 “Rising Star” by Southern California Super Lawyer Magazine. Vakil is a resident of Irvine, Calif.

Less than .01 percent of all lawyers in the country are named in the Lawdragon 500 and an additional 2,500 attorneys are recognized as a “Lawdragon Nominee.” The list is published online and in the summer 2006 issue of Lawdragon magazine.

07-21-2006

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