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Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

Developments in Asia
David Hill, a Finnegan Henderson Reston office lawyer, authored an article about recent developments in the technology-transfer laws of China, Japan and South Korea.

07-14-2006

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Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

Demystifying IP Due Diligence
Finnegan Henderson lawyers Michele Bosch and Adriana Burgy authored an article that outlines a three-stage approach to conducting IP due diligence and explains its application in a typical corporate scenario. This three-stage IP due diligence approach helps converge business goals with the goal of deriving maximum value from IP.

07-14-2006

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Blank Rome LLP.

Court Finds That the Government Improperly Interfered with KPMG'S Advancement of Legal Fees and Expenses to its Partners and Employees Under Criminal Investigation and Indictment
Just last week, the U.S. District Court for the Southern District of New York ruled that the government had violated the rights of certain partners and employees under the Fifth and Sixth Amendments to the U.S. Constitution by pressuring the accounting firm KPMG LLP to cut off the payment of defense costs for its partners and employees. United States v. Stein et al., No. S1 05 Crim. 0888 (LAK), -- F. Supp.2d --, 2006 WL 1735260 (S.D.N.Y. June 26, 2006). The decision is highly significant for all companies and their employees. The federal government has, in recent years, attempted to use such pressure on corporations as a method for corporations under investigation to show their “cooperation” with the government, and get favorable treatment. The ultimate result, however, is that corporate officers, directors, and employees may lose representation by counsel of their choice, or in some instances, any counsel at all.

The case concerns the Internal Revenue Service’s well-publicized investigation of allegedly fraudulent tax shelters by KPMG. The IRS ultimately referred the matter for potential criminal prosecution to the U.S. Department of Justice, which, in turn, referred it to the United States Attorney’s Office (USAO) for the Southern District of New York. After several of its partners received rather rough treatment while testifying before a Senate subcommittee also looking into the matter, KPMG decided that, to avoid the fate of Arthur Andersen, it needed to “clean house.” After terminating several partners, and as part of that house cleaning, lawyers for KPMG met with federal prosecutors assigned to the case in an attempt to stave off prosecution of the firm.

At that time (early 2004), as many as thirty KPMG partners and employees were notified by the government that they were “subjects” of the federal grand jury investigation of the tax shelters (i.e., not targets who the government sought to prosecute, but persons in whom the government had an interest and who might subsequently become targets). A number, including the defendants in this case, were later indicted. During the initial discussions between KPMG and the prosecutors, the latter asked whether KPMG was paying the legal fees and expenses of its employees under investigation.

The government’s inquiry was based on what has become known as the “Thompson Memorandum” (for U.S. Deputy Attorney General Larry D. Thompson). Formally entitled Federal Prosecution of Business Organizations, this memorandum sets forth, among other things, the factors federal prosecutors must consider in determining whether to criminally charge a corporation. The government’s interpretation of the fourth factor—“ the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection”— became the issue in the case. This factor instructs prosecutors who are assessing a corporation’s cooperation to determine “whether the corporation appears to be protecting its culpable employees and agents,” by, for example, “the advancing of attorney’s fees” to them.

KPMG’s initial response to the government’s inquiry concerning attorneys’ fees was non-committal. The prosecutors continued to raise the attorneys’ fee issue in subsequent communications, however, and KMPG eventually concluded from these repeated inquiries that the government was viewing any payment of employees’ attorneys’ fees by KPMG negatively. Accordingly, KPMG began “cooperating” on the matter of attorneys’ fees. It decided to pay employee attorneys’ fees only in cases where the employee cooperated with the government and then only up to a certain, relatively minimal cap, and if the employee was indicted, KPMG would immediately cease paying fees. Also, at the government’s request, KPMG notified its employees that they could choose to deal with the government without counsel. And whenever the government notified KPMG counsel that a KPMG employee had failed to submit to an interview with the government, KPMG would notify the employee that he or she had ten days to submit or otherwise KPMG would stop the payment of legal fees. As a result of this “cooperation,” KPMG entered into a Deferred Prosecution Agreement with the government, pursuant to which a one-count criminal information against the company would be dismissed if KPMG, in addition to its other obligations (such as paying a $456 million fine), continued its extensive cooperation.

In unusually harsh language directed at the government, the Court found that the “government held the proverbial gun to [KPMG’s] head” by pressuring KPMG to cut off the payment of legal fees and expenses to individuals under investigation or indictment. The Court noted that KPMG had a “long-standing policy” and “unbroken track record” of paying the legal expenses of its partners and employees incurred as a result of their jobs, without regard to cost.

The Court found that the Thompson Memorandum, as implemented by the government here, violated the Due Process Clause of the Fifth Amendment because it denied the defendants the fundamental right to defend themselves using resources that were lawfully available to them, free from governmental interference. The Court also found a violation of the Sixth Amendment right to counsel, in that the government interfered with the defendants’ right to be represented by counsel of their choice. To remedy the violation, Judge Lewis A. Kaplan took the unusual step of directing the Clerk of Court, as ancillary to the criminal proceeding, to open a civil docket number to accommodate the claims of the KPMG defendants against KPMG for reimbursement of defense costs. He strongly urged the government, however, to use its “substantial influence and . . . power” over KPMG to cause KPMG to advance those costs to the defendants without the need for further litigation.

The Court’s ruling is subject to two important corollaries. First, in those situations where a corporation is legally obligated to pay defense fees and costs, its doing so cannot be deemed by the government as a failure to cooperate. Second, and on the other hand, a corporation’s advancement of fees and expenses may be considered as one sign of a lack of cooperation where the corporation does so with the intent to impede or obstruct the government’s investigation.

The Stein case is of vital importance both to corporations and any employees who find themselves under the cloud of a criminal investigation. For corporations, the ruling provides them with impetus to resist governmental pressure to cut off the advancement of legal fees and expenses to their employees. As the Court recognized, corporate entities typically offer to pay employees’ attorneys’ fees where an employee is involved in an investigation as a result of doing his or her job. Doing so helps a corporation to hire and retain competent and honest employees. Stein also may provide legal support for corporations to resist another recently employed government tactic: pressuring corporations to waive the protections of the corporate attorney-client and work product privileges and turn over to the government such communications, including reports of internal investigations. Waiver of these protections is another factor that the government considers in determining corporate “cooperation,” and is currently another hotly debated issue within the legal and corporate community.

For company officers, directors, and employees faced with investigations or indictments involving complex white-collar and regulatory crimes, the advancement of legal fees and expenses is often the difference between an effective and fair defense, and an inadequate defense or, in some instances, no defense at all. The Court noted that substantial resources are needed to defend properly cases, like the alleged tax-shelter frauds at issue in Stein, where a proper defense may require review of millions of pages of documents, and interviews of hundreds of witnesses. Individuals who find themselves, wrongly or otherwise, caught up in corporate scandals should not have to choose between being forced to cooperate with the government, regardless of whether or not that is in their best interest, or being cut off from the payment of legal fees that their corporate employers have obligated themselves to make. Stein may have dealt a death blow to the chilling effect that choice has on a person’s ability to defend him or herself.

07-14-2006

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Blank Rome LLP.

Waste' Doctrine and So-Called 'Active/Passive Dichotomy'
As is my wont, I have been reading some very recent and a few slightly older cases (even I don't get to every advance sheet as soon as I should). One of those decisions dealt with a matter that is not uncommon, but did so in a somewhat uncommon way.

While thinking about that case, I came to the realization that what has traditionally been viewed as two separate lines of cases really, at bottom, deals with the same issue. Moreover, that realization makes me wonder whether or not we have dealt with that issue properly.

Good tease, huh?

Also, I came upon two cases, one of which suggests a drastic change in the law without ever discussing the point, and the other refers to a line of authority supporting a proposition that I think most of us have been unaware of. That will keep you reading until the end, I trust.

The decision which instigated this line of thought is Brzuszkiewicz v. Brzuszkiewicz, 28 AD3d 860, 813 NYS2d 793 (3rd Dept. 2006). The trial court, dealing with a 23-year marriage, made a very unequal distribution of the extant marital property in the wife's favor; she received the entirety of all marital assets (except the pensions) and the husband received all of the debt (negative assets). The Third Department affirmed this result.

The principal reason for its doing so was that the evidence showed that the husband mismanaged rental properties so that the income never exceeded the expenses, that he incurred excessive credit card debt and invested the moneys obtained from those debts in a business which provided no economic benefit to the parties. The court noted that, as a result, the marital residence was the only remaining marital asset of significance and even that had equity of only $16,000-$24,000 because the husband had extracted most of its value ($96,000 in equity) through refinancing to pay off the credit card debt. The parties' remaining debt exceeded $90,000 and they also faced a large deficiency judgment because of a foreclosure on the mortgage on the rental property.

'Waste' Doctrine

This case is, obviously, one that follows the ""waste"" doctrine. What is the other doctrine I referred to? It is valuation dates and the so called ""active/passive dichotomy.""

First, a brief history. As you all know, the Court of Appeals, in Price v. Price, 511 NYS2d 219 (NY 1986) held that the appreciation in value of separate property was marital property to the extent that it arose from the actions of the titled spouse — irrespective of whether or not the nontitled spouse had any direct involvement in the enterprise. That nontitled spouse's indirect assistance by caring for children, attending business social events and so on gave rise to the conclusion that the appreciation was ""due"" to his efforts because the titled spouse could not have managed the business so as to increase its value without these indirect contributions as she would have to worry about the children and all of those ""home fires"" activities.

The Court of Appeals in Price went on to assert that purely passive appreciation (the separate property was IBM stock and the titled spouse was not in IBM's management circle) remained separate property. The theory clearly was that if the titled spouse, herself, had nothing to do with the growth, the actions of the nontitled spouse could not have indirectly contributed to that growth. All of that is nothing new and is not the subject of much controversy. At some point what is ""active"" or ""passive"" growth can become a factual issue but the legal one is not too complex.

Active/Passive Dichotomy

The active/passive dichotomy comes into play in another context, however. That context is: What happens to property that is managed by one spouse after the date of commencement? On the assumption that the other spouse is no longer contributing indirectly to the growth of that business, courts and attorneys reasoned that the Price dichotomy should be reversed. Active appreciation after the date of commencement would belong to the managing spouse while passive appreciation would belong to the marital estate.

That, assumption, in turn, led to the conclusion that ""active"" property should be valued at date of commencement and ""passive"" property at date of trial, absent unusual factors. [For one case applying those other factors, see Smerling v. Smerling, 526 NYS2d 271 (1st Dept. 1991; chain of movie theaters sold after date of commencement; not error to use that sales price to value the asset).] The governing statute (Domestic Relations Law [DRL] §236) states that marital property is to be valued someplace between the date of commencement and the date of trial. Case law also so provides for a similar result (see Wegman v. Wegman, 509 NYS2d 342 (2nd Dept. 1986).

Now, how do these two doctrines merge? The waste doctrine is based on the assumption that it is an injury to the marital estate if one party improvidently invests or manages marital assets and, therefore, that the other party should be recompensed for that loss. However, what are these ""marital"" assets that are being wasted? In O'Brien v. O'Brien, 498 NYS2d 743 (NY 1985), the Court of Appeals held that marital property did not exist during the normal course of marriage but arose ""full blown like Athena"" upon the filing of a summons in a matrimonial action. Until that event, assets that are owned by the parties are governed by common-law rules. A husband or wife can dispose of assets titled in his or her sole name at will and the other can say nothing about it. Marital property, as the Court of Appeals stated, does not exist, except perhaps as an inchoate expectation.

I am not terribly interested here with what the husband in Brzuszkiewicz actually did. My interest and concern arise from the fact that there is nothing in the opinion that states that he intentionally mismanaged the assets or that indicates that all of the losses were incurred just prior to the date of commencement (see below). Mr. Brzuszkiewicz may well have been a wholly incompetent businessman and investor and, moreover, he may well have been one who didn't know when to quit and simply put his money into a bank. However, the woods are full of people whose business ventures have failed and whose business acumen is highly suspect. (I'm the guy with his money in banks and mutual funds — I know what I don't know).

I have no particular problem with the waste doctrine if the losses are intentional. Moreover, if the losses occurred very close to the date of commencement, and there was evidence that it was intentional in order to interfere with the equitable distribution, I do not have a theoretical problem with the application of the waste doctrine. However, in that situation I would want the trial judge to make specific determinations as to the existence of that baleful intention. Obviously, the doctrine should be applied to the moneys spent on the mistress/paramour.

'Simply Wrong'

However, in every other instance I think that the doctrine is simply wrong. Except for tax shelters (which are sui generis) it is enormously unlikely that any sane person would invest in any business or buy any rental property with the intention of losing money. I doubt that Mr. Brzuszkiewicz did so either.

Let us suppose that a rental property managed by the wife had made lots of money. Would her husband have decided that he would not claim a share of that money? If her business had been successful, would he eschew an interest in it? The answer is ""of course not."" But, if that is so, isn't the court, in punishing the investing spouse economically for the bad investments, really allowing the other spouse to have his cake and eat it too?

Moreover, the approach of economic punishment for bad investments leads to all sorts of complex issues. What if the investments were once worth $500,000 and were worth only $200,000 at the valuation date? Should the investor spouse be amerced because the asset wasn't sold at the high watermark? Are we requiring spouse investors to guarantee investment success while we don't require that of our brokers and investment advisers? It is also highly likely that the noninvestor spouse (in the active sense) also approved of the investments (explicitly or implicitly). Why should he have the right to complain in hindsight?

The essence of my concern with ""waste"" is that the investing spouse almost certainly did not have any intention of losing money — it just happened. Now, let us take that thought and consider it in the context of post-date of commencement assets. As noted, the courts have generally applied the theory that the managing spouse should receive the benefit of appreciation (and the injury of depreciation) in actively managed assets after the date of commencement. That has resulted in the valuation of these assets as of the date of commencement although there is no statutory or Court of Appeals authority so requiring. The courts have also valued ""passive"" assets as of a date close to trial so that neither party was advantaged or disadvantaged by the actions of the market.

Separate Property

What has happened is that the seeming logic as to how to deal with the appreciation of separate property during the marriage (ala Price) has been carried over whole into the valuation date query for ""active"" and ""separate"" property. The reality is that the marital/separate property distinction between active and passive property has been utterly reversed.

But, why don't the same considerations that we discussed with respect to precommencement waste apply here too? Suppose the wife essentially knows that she (as the operating head of a business that cannot realistically be sold) is going to receive the United Widget Co. after the dust has settled. Why would she possibly manage the business so as to lose money? Or so as to depreciate its value? Obviously, no rational person would do that. Even if she had to share some percentage of the increase in value during the period prior to trial with her husband, any rational person would rather split $100 dollars with their ex-spouse than lose $200. There is simply no reason why, as a general rule, any diminution in value of an actively managed asset (post-date of commencement) should be ascribed solely to the detriment of the managing spouse. Nor is there any good reason why the appreciation of that marital asset should not be divided with the other spouse just as the growth of any passive asset would be? (It is conceivable that someone, some day, might wish to cut off his own nose to spite his soon-to-be ex's face, but, in those very rare situations, I would think that there would be ample evidence that the manager was either crazy — and shouldn't be amerced because of it — or if proved to be malicious in losing the value, he should be amerced by the court ala Brzuszkiewicz. I would suggest that the proof of such malicious actions should be by clear and convincing evidence because the presumption has to be that the managing spouse was trying to turn a profit and increase the value of the asset because that is how most people behave.)

Analysis

To sum, I think that we have made a fundamental error in applying a rule that active assets are valued at date of commencement and that they should be valued at the time of trial unless there is clear and convincing evidence that the diminution in value was intentional on the managing spouse's part. (One alternative would be for these assets to be divided in vastly differing percentages from those used for the other assets. See Hartog v. Hartog, 623 NYS2d 537 [NY 1995] and Arvantides v. Arvantides, 489 NYS2d 58 [NY 1985], although in practice I doubt that this would often occur. In any case, I believe that using a date of trial valuation for everything makes the most sense.)

Shifting gears now, in Hougie v. Hougie, 261 AD2d 161, 689 NYS2d 490 (1st Dept. 1999), the court happened to mention, almost in passing and without any discussion, that enhanced earning capacity was subject to equitable distribution. The Second Department rejected that holding in Spence v. Spence, 287 AD2d 447, 731 NYS2d 66 (2nd Dept. 2001). I do not intend here to discuss those cases. I only want to mention a very recent decision by the Second Department which contains one of those provocative, throwaway lines such as that in Hougie. In Fruchter v. Fruchter, 2006 WL 1493623 (2nd Dept. 2006) the court wrote: ""First, his legal training and employment are not marital property because he received his law degree before the marriage."" (emphasis supplied) The court cited to both O'Brien and Spence. Taken literally, that would seem to exclude professional practices from equitable distribution if the degree (and note, not the license) were obtained pre-marriage. As the court does not discuss this point further, I won't speculate any more here.

However, now that you all know about the language, I'm sure that some further cases will consider this sentence from Fruchter. I await those decisions eagerly.

Final Case

Our last stop is G. v. G., NYLJ, March 3, 2006, (Sup. Ct. Queens Co., Gartenstein, J.H.O.). First off, I always like to acknowledge a great turn of phrase and Judicial Hearing Officer Stanley Gartenstein hit the bull's-eye with his opening sentence: ""According to Dr. Gomes, he possesses the unique distinction of having consistently cheated on his paramour with his lawfully wedded wife. This ongoing liaison with his wife, he explains, was necessary solely to satisfy his 'male needs.'"" The court goes on to note that Dr. Gomes managed to impregnate both his wife and mistress almost simultaneously. Alas, we cannot tarry here nor can we attempt to figure out the existential problem posed by Dr. Gomes. I do suggest, however, that everyone read the decision because there are still more surreal moments to discover.

Our task, however, is to consider what happens to the valuation date when one action is discontinued and another action later commenced. It is fairly well-known that voluntary discontinuances are routinely granted (even at the eve of trial) and that such discontinuances are often with the intention of recommencing an action so as to ""suck in"" property acquired after the date of the first summons.

What is perhaps less well-known is that the case law strongly holds that, unless there is a real reconciliation between the parties, the original commencement date will control for valuation purposes. See, for example, Lamba v. Lamba, 266 AD2d 515, 698 NYS2d 715, 716 (2nd Dept. 1999) where the court wrote: ""The Supreme Court erred in granting plaintiff's motion to have the defendant's pension valued as of July 6, 1994, the date the instant action was commenced, as opposed to the date that a previous, discontinued divorce action was commenced . . . ."" The error arose from the fact that her moving papers ""contained no evidence that the parties reconciled and continued to receive the benefits of the marital relationship."" Judge Gartenstein followed these cases. Question, however, how can these cases be reconciled with the Court of Appeals' decision in Anglin v. Anglin, 592 NYS2d 630 (NY 1992) holding that even a separation decree did not block the acquisition of marital property and the statutory language in §236.4(b) that provides that the court shall set a valuation date between the date of commencement and that of trial? Is there some unspoken legal fiction that the first case still exists? Or some sort of tacit estoppel concept underlying these cases? I do believe, however, that they, nonetheless, reach the equitable result. Anglin, by the way, was 4-3 and both sides cited the same Law Journal article by me in support of their conclusions, and, so, maybe I should stay away from this subject. A happy remainder of the summer to all.

07-14-2006

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Forchelli, Curto, Schwartz, Mineo, Carlino & Cohn, LLP

Partners Donald Jay Schwartz and Richard A. Blumberg Featured in the Latest Issue of Long Island Business News
Partners Brian R. Sahn & Aaron Gerhonowitz have published an article in the latest issue of the Nassau Lawyer.

Summarizing one of the main points of the article, Sahn and Gershonowitz explain, ""The DEC has begun to focus on vapor intrusion as a significant problem not only at sites that are undergoing remediation, but also at and around sites at which remediation has been completed. The application of this new policy has resulted in the installation of remediation systems in private homes that are near contaminated sites, the use of vapor barriers or venting systems in construction of new buildings and the reopening by the regulators of remediated sites.""

Brian R. Sahn concentrates his practice in all facets of commercial real estate transactions, including purchase and sale agreements, acquisition financing, industrial development transactions, commercial lease agreements and real estate service agreements. Mr. Sahn has represented several large public and private companies in the management, development, disposition and acquisition of their real estate holdings, frequently involving complex environmental, title and facilities problems. He has represented defense contractors in facility closures and divestitures, and in negotiations with local redevelopment agencies and municipal representatives. Mr. Sahn also represents institutional lenders in commercial real estate and multi-family loan transactions.

Aaron Gershonowitz concentrates his practice in environmental law and has represented clients in a wide variety of environmental issues, including Superfund matters, RCRA compliance, asbestos in buildings, and the environmental aspects of real estate and corporate transactions. Additionally, Mr. Gershonowitz’s practice has included the representation of military contractors with regard to closure of facilities, transfer of facilities, and the related negotiations with the United States government and other local governmental agencies.

07-14-2006

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Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P.

Escudier, Haedicke, and Katz Join the New Orleans Office
The law firm of Jones, Walker, Waechter, Poitevent, Carrère & Denègre, L.L.P. is pleased to announce that Jean-Paul A. Escudier, Stephen J. Haedicke, and Jonathan R. Katz have joined the firm as associates.

Mr. Escudier is an associate in the Admiralty and Maritime Practice Group. He received his B.A. in Biological Science and Physics from the University of Mississippi in 1999 and his J.D. and B.C.L. from Paul M. Hebert Law Center, Louisiana State University in 2004. Prior to joining Jones Walker, he served as a law clerk for the honorable G. Thomas Porteous, Jr., United States District Court, Eastern District of Louisiana.

Mr. Haedicke is an associate in the Business and Commercial Litigation Practice Group. He received his B.A. in Philosophy and Political Science from the New College of the University of South Florida in 1998 and his J.D. from Northwestern University School of Law, graduating cum laude. Prior to joining Jones Walker, Mr. Haedicke worked as an assistant public defender.

Mr. Katz is an associate in the Tax Practice Group. He received his B.S. in Economics from the University of Texas in Austin in 2002, his J.D. from Loyola University New Orleans School of Law in 2005, graduating cum laude, and his LL.M. in Taxation Law from New York University School of Law in 2006. Prior to joining Jones Walker, Mr. Katz served as an assistant to United States Senator Mary L. Landrieu.

07-14-2006

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Young, Clement, Rivers & Tisdale, L.L.P.

Young Clement Rivers, LLP featured in the 2006 Chambers USA America's Leading Lawyers for Business
The Firm:
A more compact outfit than most in this table, this Charleston firm is a respected player in the state. It has a strong focus on IP and its most prominent clients include technology, telecom and software companies.

The Lawyers:
The ""excellent"" Rutledge Young is a great choice for health care matters, according to interviewees. His practice also includes product liability and complex commercial disputes in both state and federal courts.

07-14-2006

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