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Corporate Counselor

Volume 27, Number 12 April 2013

Quarterly State Compliance Review

By Sandra Feldman This edition of the Quarterly State Compliance Review looks at some recently enacted and introduced legislation of interest to corporate lawyers. It also looks at some recent cases of interest, including Delaware and California decisions dealing with the ability to sue dissolved corporations.

Strategies for Responding to FRCP 30(b)(1)

By John C. Eustice

In The State Legislatures

There were several bills of interest that either went into effect or were introduced during the period between Jan. 1, 2013 and April 1, 2013. Highlights include the following: In New Jersey, Assembly Bill 1543, effective March 8, enacted the Revised Uniform Limited Liability Company Act. Among the differences between the Revised Act and the LLC act it replaces are that the Revised Act provides that an operating agreement may be oral or implied, that an LLC has perpetual duration, that the default rule for allocating profits, losses and distributions is on a per-capita basis, and that an LLC is required to provide indemnification under certain circumstances. continued on page 9

our company is engaged in civil discovery and is served with a Rule 30(b)(1) notice identifying a specific corporate officer or director to be produced for deposition. The designee is busy, located overseas, knows little about the issues in the lawsuit, does not want to sit for a deposition, or some combination of the above. What are your options? Most in-house counsel know to argue that a high-level executive, such as the CEO, is an apex witness who should not be deposed until the noticing party has exhausted alternative discovery means. Another argument counsel may not know, however, involves using the text and intent of Rule 30(b)(1) to curtail these depositions. Although most courts have interpreted Rule 30(b)(1) to allow such depositions, one particular well-reasoned opinion examining the rule provides a blueprint for counsel to resist convention and effect a better outcome for their companies. This uphill battle is often worth fighting, as it empowers institutional parties to preclude or at least place limits on an opposing partys ability to demand depositions of named officers, directors, and managing agents.

Federal Rule

Civil Procedure 30

Rule 30(a)(1) provides that, subject to certain exceptions, [a] party may, by oral questions, depose any person, including a party, without leave of court. Rule 30(b)(1), the notice provision, provides only that a party who wants to depose a person by oral questions must give reasonable written notice to every other party. Where the party to be deposed is a corporation or other institutional party, both Rules 30(a)(1) and 30(b)(1) are silent on whether the discovering party can direct which institutional representative appears for deposition. Rule 30(b)(6), which was added in the 1970 amendments to the Federal Rules, is the sole provision in the discovery rules that permits a party to take, by notice, the deposition of an institutional party. That rule allows a party to name as the deponent a corporation, a partnership, an association, a governmental agency, or other entity and describe with reasonable particularity the matters for examination. Following receipt of such a notice, Rule 30(b)(6) requires [t]he named continued on page 2

In This Issue
Responding to FRCP 30(b)(1).................. 1 Quarterly State Compliance Review.... 1 Insurer Billing Guidelines............... 3 VAs New EmploymentBased Tort............... 5 The Noel Canning Decision................. 7 PERIODICALS Intangible Assets.....11

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continued from page 1 organization to designate one or more officers, directors, or managing agents, or designate other persons who consent to testify on its behalf. Until 1970, the only way a litigant could examine an institutional party was to notice the depositions of authoritative individuals (i.e., officers, directors, or managing agents) by serving the institution pursuant to Rule 30(b)(1). This practice often led to wasteful depositions of individuals lacking relevant knowledge. It also led to litigation about who constitutes a managing agent. See 7-30 Moores Federal Practice - Civil 30.03[2] (2009). When Rule 30(b)(6) was added, it provided a vehicle through which a party can obtain the actual knowledge of an institutional party on matters relevant to the litigation. Although the Advisory Committee made clear that Rule 30(b)(6) supplements and does not replace the earlier method by which a party may depose an organization, Rule 30(b) (6) should be viewed as the preferred method because it seeks an organizations relevant knowledge. Indeed, Rule 30(b)(6) was designed to assist organizations which find that an unnecessarily large number of their officers and agents are being deposed by a party uncertain of who in the organization has knowledge. See Advisory Committee Notes for the 1970 Amendments. This brief history reveals the intent of Rule 30 with respect to institutional parties: to empower litigants to notice, depose, and obtain relevant information from the institutional party itself. Noticing the deposition of an officer, director, or managing agent lacking substantive knowledge is far less efficient than serving a Rule 30(b)(6) notice, and gets a party no closer to reaching this goal. John C. Eustice is counsel at the law firm Miller & Chevalier Chartered in Washington, DC. He can be reached at 202-626-1492 or

Leaving No Stone Unturned

Despite the text of Rule 30(b)(1), courts have generally interpreted it to allow litigants to notice for deposition any officer, director, or managing agent of an institutional party. The select few courts that have examined the text and intent of Rule 30(b) (1), however, have not arrived at the same conclusion. Magistrate Judge Ronald Boyce engaged in a robust analysis of the rule in Stone v. Morton Intl, Inc., 170 F.R.D. 498, 500 (D. Utah 1997). After reviewing the text of Rule 30 and associated case law, the court concluded that the Rules of Civil Procedure do not provide direct and concrete support for the obligation of a corporation to produce a director, officer or managing agent pursuant to notice under Rule 30(b) (1), and, accordingly, denied a motion to compel the production of a corporate officer for deposition who was located overseas as demanded in a deposition notice. Id. at 503-04. Magistrate Judge Boyce recognized a key fact lost on most courts: Nothing in Rule 30(b)(1) obligates a corporation to produce an officer, not a party to the litigation, at a deposition. 170 F.R.D. at 500. Indeed, although Rule 30(b)(1) allows a party to notice for deposition on oral examination any (sic) person, [n]othing in Rule 30(b)(1) refers to a corporation or a director managing agent, or officer. Id. Rule 30(b) (1) does not expressly obligate a corporation to produce a corporate director, officer or managing agent in the litigation forum for deposition. Id. at 501. Given the text of the rule and its intent, why should a non-party officer of a corporation be subject to deposition by notice to the corporation without any showing that the officer possesses any relevant knowledge at all? The Stone court held that imposing an obligation that every organization automatically produce any of its officers, directors, or managing agents pursuant to a deposition notice would be problematic for at least three reasons. 170 F.R.D. at 501. First, the forum may be remote to the residence and place of business of the continued on page 8

The Corporate Counselor

EDITOR-IN-CHIEF . . . . . . . . . . . . . Adam J. Schlagman EDITORIAL DIRECTOR . . . . . . . . . Wendy Kaplan Stavinoha MARKETING DIRECTOR . . . . . . . . Jeannine Kennedy GRAPHIC DESIGNER . . . . . . . . . . Amy Martin BOARD OF EDITORS JONATHAN P. ARMSTRONG . Duane Morris London, UK STEVEN M. BERNSTEIN . . . . Fisher & Phillips, LLP Tampa, FL VICTOR H. BOYAJIAN . . . . . SNR Denton Short Hills, NJ JONATHAN M. COHEN . . . . Gilbert LLP Washington, DC Elise Dieterich . . . . . . . . . Kutak Rock LLP Washington, DC DAVID M. DOUBILET . . . . . . Fasken Martineau DuMoulin, LLP Toronto SANDRA FELDMAN . . . . . . . CT Corporation New York WILLIAM L. FLOYD . . . . . . . . McKenna Long & Aldridge LLP Atlanta JONATHAN P. FRIEDLAND . . Levenfeld Pearlstein LLP Chicago BEVERLY W. GAROFALO . . . Jackson Lewis LLP Hartford, CT ROBERT J. GIUFFRA, JR. . . . . Sullivan & Cromwell LLP New York HOWARD W. GOLDSTEIN . . Fried, Frank, Harris, Shriver & Jacobson New York ROBERT B. LAMM . . . . . . . Attorney Boca Raton, FL JOHN H. MATHIAS, JR. . . . . Jenner & Block Chicago Paul f. mickey jr. . . . . . . . Steptoe &Johnson LLP Washington, DC ELLIS R. MIRSKY . . . . . . . . . . Mirsky and Associates, PLLC Tarrytown, NY REES W. MORRISON . . . . . . Rees Morrison Associates Princeton Junction, NJ E. FREDRICK PREIS, JR. . . . . . Breazeale, Sachse & Wilson, L.L.P. New Orleans SEAN T. PROSSER . . . . . . . . . Morrison & Foerster LLP San Diego ROBERT S. REDER . . . . . . . . Milbank, Tweed, Hadley & McCloy LLP New York ERIC RIEDER . . . . . . . . . . . . Bryan Cave LLP New York DAVID B. RITTER . . . . . . . . . Neal, Gerber &Eisenberg LLP Chicago MICHAEL S. SIRKIN . . . . . . . Proskauer Rose LLP New York LAWRENCE S. SPIEGEL . . . . Skadden, Arps, Slate, Meagher & Flom LLP New York STEWART M. WELTMAN . . . . Fishbein Sedran & Berman Chicago

The Corporate Counselor (ISSN 0888-5877) is published by Law Journal Newsletters, a division of ALM. 2013 ALM Media, LLC. All rights reserved. No reproduction of any portion of this issue is allowed without written permission from the publisher. Telephone: (877)256-2472 Editorial e-mail: Circulation e-mail: Reprints: The Corporate Counselor P0000-233 Periodicals Postage Pending at Philadelphia, PA POSTMASTER: Send address changes to: ALM 120 Broadway, New York, NY 10271 Published Monthly by: Law Journal Newsletters 1617 JFK Boulevard, Suite 1750, Philadelphia, PA 19103

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April 2013

The Indefensible Defense

How to Counter Insurer Billing Guidelines
By Ty Childress Generally, an insurer has three options when a claim is tendered for defense. An insurer may deny any obligation to defend, agree to fully defend without reservation, or agree to defend while reserving rights to deny coverage later. Policyholders need to consider a whole host of issues when an insurer agrees to defend under a reservation of rights including, but not limited to, who controls selection of underlying defense counsel, rates to be paid to that counsel, privilege issues associated with underlying counsel communications, and potential conflicts between the policyholders and the insurers interests. One source of increasing disputes between policyholders and their insurers is the increasing attempted use of so-called litigation management guidelines by insurers in addressing their defense obligations. Contrary to what insurers often claim, these types of guidelines generally do not have any binding legal effect. Policyholders should consider carefully how to respond to an insurers attempt to impose such guidelines. Frequently, in agreeing to defend a claim, an insurer will attach to its response a document titled Litigation Management Guidelines or something similar. Typically, the guidelines purport to dictate various rules and procedures that the policyholder and its underlying defense counsel must comply with in order to have the insurer pay defense costs. The guidelines will often address such issues as: 1) the hourly rates the insurer will pay; 2) insurer pre approval for various expenses (i.e., experts); 3) what costs the insurer will or will not pay (i.e., Ty Childress is a partner in the Los Angeles office of Jones Day. E-mail: or go to
April 2013

overnight delivery, travel, copying); 4) underlying counsel reporting and budget requirements; and 5) staffing/billing expectations (i.e., intraoffice conferences, number of counsel attending depositions). As an initial matter, policyholders should be aware that these guidelines are almost certainly not legally binding. Very rarely do insurers attach or incorporate billing guidelines in the policy when it is issued. Thus, as a matter of simple contract law, the billing guidelines do not form a part of the insurance contract. From a legal perspective, such billing guidelines represent little more than an insurers opinion or wish list regarding underlying defense issues.



Legal Problems

Setting aside the dubious contractual enforceability of insurer billing guidelines, many jurisdictions have criticized, and even rejected, insurer billing guidelines as improperly interfering with a defense counsels ethical obligations to its client, the insured. The ethical issue was summarized by The West Virginia Lawyer Disciplinary Board as follows: Although the apparent purpose of these guidelines is to effect economy, the ineluctable result is to constrain or limit an attorneys exercise of independent professional judgment, either by (1) precluding payment for certain activities (even if the attorney deems the activities to be appropriate) or (2) requiring the attorney to submit to second guessing of the attorneys judgment and decisions and then precluding payment if the attorney acts in a manner contrary to such second guessing. Due to this second guessing concern, legal ethics authorities in several states have held that insurer billing guidelines interfere with an attorneys independent professional judgment and, accordingly, a defense attorney not only need not, but potentially may not ethically, agree to abide by such guidelines. See, e.g., Rhode Island Supreme Court Ethics Advisory Panel Opinion No. 99-13 (issued Oct. 27, 1999) (the litigation management guidelines interfere with the in-

dependent professional judgment of defense counsel and ultimately with the quality of legal services provided to the insureds. As such, the [attorney and his/her firm] may not ethically agree to abide by these guidelines in their entirety.); Iowa Supreme Court Board of Professional Ethics and Conduct Opinion No. 99-01 (Sept. 8, 1999) ([i]t is the opinion of The Board that: (1) it would be improper for an Iowa lawyer to agree to, or accept or follow guidelines which seek to direct, control, or regulate the lawyers professional judgment or details of the lawyers performance, dictate the strategy or tactics to be employed; or limit the professional discretion and control of the lawyer.) The rejection of insurer billing guidelines has not been limited to ethics panels. Numerous courts have reached similar conclusions. For example, the California Court of Appeals expressly question[ed] the wisdom and propriety of so-called outside counsel guidelines by which insurers seek to limit or restrict certain types of discovery, legal research, or computerized legal research by outside attorneys they retain to represent their insureds where there is a potential for an uncovered claim. Dynamic Concepts, Inc. v. Truck Ins. Exch., 61 Cal. App. 4th 999 (1998). The court concluded that [u]nder no circumstances can such guidelines be permitted to impede the attorneys own professional judgment about how best to competently represent the insureds. Similarly, the Supreme Court of Appeals of West Virginia has held that an insurance company possesses no right to control the methods or means chosen by the attorney to defend the insured. Barefield v. DPIC Companies, Inc., 215 W.Va. 544, 600 S.E.2d 256 (2004).

Practical Considerations
The lack of enforceability of insurer billing guidelines as a matter of both contract law and ethics provides corporate policyholders with strong ammunition to reject any attempt by an insurer to unilaterally impose such guidelines. Nevertheless, the ultimate objective, of course, is to reach consensus with continued on page 4

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Insurer Guidelines
continued from page 3 the insurer regarding a cost-effective vigorous defense that allows reasonable input from the insurer in a manner that does not impede or restrict the defense effort. Identified below are some of the more frequent billing guideline disputes that arise between corporate policyholders and their insurers and some suggested approaches for resolution. Hourly Rates Some litigation guidelines purport to list the highest hourly rate that the insurer will pay for the defense of a particular matter. Again, that identified rate simply reflects the unilateral opinion of the insurer as to the hourly rate it wishes to pay. Generally, unless the policy expressly says otherwise or is subject to statutory provisions in certain states, a policyholder is entitled to retain any qualified counsel whose hourly rates are consistent with the rates paid in that geographic area for that type of case. As would be expected, the reasonable hourly rate for handling complex securities litigation in New York is likely to be quite different than a routine personal injury claim in North Dakota. A policyholder should certainly try, if at all possible, to reach an agreement from the outset with its insurer about the identity and hourly rates of underlying defense counsel. As an initial matter, a policyholder should review its policy to see whether the policy contains a list of law firms who the insurer has preapproved (so-called panel counsel) and whether any such list simply identifies potential firms or actually purports to limit the policyholder to choosing one of the listed firms. If the policy does not specify a firm to use, a policyholder should ensure that the hourly rates of its selected firms are reasonable for the jurisdiction and type of matter. While some states have statutes that address (and may limit) an insurers hourly rate reimbursement obligations in certain settings, a policyholder is otherwise generally entitled to reimbursement of the actual hourly rates charged by underlying defense counsel so long as they are reasonable.

If an agreement on rates cannot be reached, one possible alternative is for the policyholder to fund the delta between the insurer rate and the actual hourly rate and reserve rights to pursue the insurer for the full amount at a later time. While such an approach has the downside of requiring the policyholder to self-fund some portion of the defense costs, it does allow for selected counsel to focus on the defense of the case. With the insurer reserving rights on the indemnity aspects of the case (i.e., whether any settlement or judgment is covered), the accumulated amount of unpaid defense costs can be added to subsequent negotiations (or coverage litigation) over whether the insurer is obligated to fund any settlement or judgment. Just as the amount at issue with respect to a settlement or judgment often impacts the nature of negotiations between a corporate policyholder and its insurer, the amount of unpaid defense costs at issue often dictates whether that gap can be resolved short of litigation. Staffing Insurers often try to exert control over staffing by attempting to pay for only pre-approved timekeepers. As the ethics opinions discussed earlier demonstrate, the decision about the appropriate attorneys for a matter belongs to the policyholder and its counsel, not the insurer. See, e.g., Board of Commissioners on Grievances and Discipline of the Supreme Court of Ohio Opinion No. 2000-3 (dated June 1, 2000) ([g]uidelines that dictate how work is to be allocated among defense team members by designating what tasks are to be performed by a paralegal, associate, or senior attorney are an interference with an attorneys professional judgment .). In order to counter an insurers attempt to claim that the staffing for the defense of a particular case was unreasonable, corporate policyholders should consider working with their defense counsel on the identification of the core attorneys involved in the defense of the case (which partner(s), associate(s), and paralegal(s) will have day-to-day responsibility) and limit the number of transient time-keepers (at-

torneys or paralegals who drift in and out of a case billing a few hours from time to time). While there is obviously an occasional need to add timekeepers either because of work demand (periods of intense discovery or trial preparation) or specific expertise (inclusion of an attorney with particular subject matter expertise on a discrete issue), the reasoning behind the use of these additional defense team members should be documented to blunt any subsequent second-guessing. Budgeting and Task Approval Corporate policyholders and insurers both have legitimate reasons to employ budgeting processes as part of the defense effort. Corporate policyholders want predictability for the likely expense associated with the defense of a case, while adjusters for the insurers generally seek to set internal reserves for what they are likely going to be asked to pay as the defense proceeds. Unfortunately, insurers far too often seek to unilaterally impose their own timing considerations for any budget and attempt to use budget estimates as some sort of cap on actual defense costs. Any party that has been involved in reasonably complex litigation knows that the timing and accuracy of budget estimates can be quite fluid as events in the litigation occur. For example, a corporate policyholder may file an early motion to dismiss in a case and, depending on how the court rules on that motion, a case could be dismissed or substantially altered. In such situations, the client and its counsel may decide it makes sense to defer budget estimates until the parties receive guidance from the court on threshold issues. Similarly, the client and its counsel may decide to create estimated budgets that contain wide ranges to account for different possibilities. How and when to employ budgeting is a decision between the client and its counsel. While, subject to privilege considerations, a corporate policyholder may choose to share its budgeting with its insurer, the insurer is not in a position to dictate that budget process. continued on page 12
April 2013

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VA Recognizes a New EmploymentBased Tort

By James V. Irving The Employment at Will doctrine, which has been broadly embraced throughout the U.S. since the 19th century, provides in general terms that in the absence of a written contract providing for employment for a limited duration, or subject to specific terms of termination, an employment relationship may be terminated by either party without explanation and without liability. In reliance on this doctrine, an employee may quit at any time without giving a reason, and an employer may fire an employee with a parallel absence of notice or explanation.

status or appearing to do so will get an employer in trouble anywhere. However some policy-defining federal regulations that may impact the Employment at Will doctrine have limited application, depending on the number of people employed by the employer. For example, the Age Discrimination in Employment Act of 1967 applies only to employers with at least 20 employees; the threshold for the Americans With Disabilities Act of 1990 is 15 employees.

Three Major Exceptions

Aside from these specific statutory requirements, three major exceptions have emerged nationally over the past half-century to the Employment at Will doctrine. These are the implied contract exception, the covenant of good faith exception and the public policy exception. In each case, the viability of the exception and the circumstances to which it applies are determined on a state-by-state basis. For example, in the 12 states that recognize the Implied Contract exception, a terminated at-will employee may still sue for wrongful termination if he or she has received oral or written assurances of continued employment, such as a representation in an employers personnel policies or an employee handbook. In another 21 states, the employee can rely on the implied contract exception only if he or she was terminated contrary to written assurances of continued employment. The Implied Contract exception is not recognized in the Commonwealth of Virginia or in 12 other states. Similarly, in 11 states, none of them Virginia, a covenant of good faith and fair dealing is implicitly part of every employment contract, permitting an employee to sue if he or she is terminated for a reason that the states courts have determined is bad faith. Bad faith has been defined by different state courts in different ways, including the imposition of a just cause standard and the prohibition of terminations for malice or ill will. In Nevada, it may be bad faith to terminate an employee in an effort to avoid paying him retirement benefits. The public policy exception is by far the most common major exception, recognized in some fashion in

all states except Alabama, Georgia, Louisiana, Maine, Nebraska, New York and Rhode Island. Under this exception, an employer may not fire an employee if doing so would violate the states public policy, or a state or federal statute. Once again, whether the grounds for a particular termination violates public policy is determined by the courts of the individual states. As we have seen in California, firing an employee for refusal to provide perjured testimony violates the public policy of the state, and in Illinois, discharging an employee for providing information about criminal activity to law enforcement authorities has been found to violate public policy.

What Happened



In 1959, in a case called Petermann v. International Brotherhood of Teamsters, Peter Petermann alleged he was terminated for refusal to give false testimony before a legislative investigating committee, and the California Court of Appeals recognized the first judicial exception to employment at will. 174 Cal. App.2d 184 (App. 2d Dist. 1959). As now modified through decades of statutory changes and the judicially imposed modifications of our Common Law, the doctrine will not shield an employer from liability for firing an employee for an improper reason. The process of defining improper reason has created an imposing body of law throughout the 50 states and Washington, DC, with each state defining its own exceptions and the parameters of them. Several improper reasons can be found in statutes adopted by the various states or by the federal government with application to the states. For example, firing an employee for reasons of race, color, gender, religion, national origin, age or handicap James V. Irving is a shareholder at Bean, Kinney & Korman, P.C. in Arlington, VA, practicing in the areas of business, employment law and litigation.
April 2013

Recently, the Virginia Supreme Court considered the breadth of its public policy exception in light of confused and sometimes controversial history. Virginia is widely recognized as a business-friendly jurisdiction and the continued vibrancy of the Employment at Will doctrine, relative to other states, is part of the reason. The state recognized no exception until 1985 when the Supreme Court of Virginia handed down Bowman v. State Bank of Keysville. 229 Va. 534 (1985). Betty Bowmans employment at the State Bank of Keysville was terminated by the bank in 1979. She sued, claiming she was terminated for an improper reason, specifically in retaliation for her refusal to vote for a proposed merger. Six years later, the Supreme Court of Virginia agreed, holding that terminating Bowman in retaliation for exercising her rights as a stockholder was a violation of public policy. Id. The Bowman opinion contained language attempting to limit the application of the exception, but its parameters were left unclear, beginning a period of uncertainty in the law as state courts wrestled with the breadth of the exception. In 1994, in Lockhart v. Commonwealth Education Systems Corp., the states high court expanded the socalled Bowman doctrine to include termination in violation of the Virginia Human Rights Act (VHRA). continued on page 6

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VA Tort
continued from page 5 247 Va. 98 (1994). Lawanda Lockhart claimed that she was terminated from her job at Commonwealth College for reporting racially offensive behavior, and her refusal to engage in such behavior. While reaffirming our strong adherence to the Employment-at-Will doctrine, the court found that the VHRA was a statement of public policy and that its violation could constitute an exception to the Employment at Will doctrine under the theory espoused in Bowman. Id. at 106. As a result, it appeared that Virginia law protected not only an employees actions in reliance in public policy, but also an employees status as a member of a protected class. Lockhart, however only increased the uncertainty and the Bowman doctrine suffered through a period of confusion and inconsistency. In 1995, the General Assembly amended the VHRA to eliminate its use as the basis of a Bowman doctrine exception to employment at will. And in 1997, in Doss v. Jamco, the court made it clear that VHRA violations could not be the basis of Bowman claims. 254 Va. 362 (1997). In Mitchem v. Counts, the court reaffirmed the viability of the Bowman doctrine when Mitchem alleged she was terminated for refusal to engage in criminal conduct of a sexual nature. 259 Va. 179 (2000). In a nuanced legal distinction, the court found that Mitchems allegations fit within the Bowman exception even though they also stated a violation of the VHRA which by its express terms, cannot form the basis of Bowman claim. Id. After Doss and Mitchem and the controversy that preceded these cases, the public policy exception settled into a stable and very narrow exception to Virginias general policy of employment at will. And so it remained until an unusual intervention by the Fourth Circuit Court of Appeals caused the Virginia Supreme Court to again consider broadening it. It did so on Nov. 1, 2012, when the Virginia Supreme Court recognized a new employment-based tort and handed down

its opinion in VanBuren v. Grubb. 2012 Va. LEXIS 193 (2012).

VanBuren v. Grubb
The case arose in an unusual context, but one reminiscent of Mitchem. Angela VanBuren was employed as a nurse by the Virginia Highland Orthopedic Spine Center, LLC in Radford, VA. The clinic was owned by Dr. Stephen Grubb, an orthopedic surgeon. According to VanBuren, Grubb hugged her, kissed her, rubbed her in inappropriate areas and made unwelcome and offensive sexual advances toward her. VanBuren further alleged that after she rejected these advances, Grubb terminated her employment, giving no explanation for the termination. VanBuren sued both Grubb and the clinic in federal court under several theories, including wrongful discharge. She substantiated her claim against Grubb by alleging that she had been fired by him for refusing to engage in criminal conduct (adultery and lewd and lascivious conduct are crimes under Virginia law), and that her termination therefore violated public policy under the Bowman line of cases. Among other things, Grubb argued that he hadnt employed VanBuren and that he couldnt be personally liable on a theory of wrongful termination. The U.S. District Court dismissed the claim, ruling that permitting non-employer liability for the tort of wrongful discharge may very well impermissibly broaden the Bowman doctrine beyond the scope that the Virginia Supreme Court would believe prudent. Vanburen v. Va. Highlands Orthopaedic Spine Ctr., LLC, 728 F. Supp. 2d 791 (W.D. Va. 2010). When VanBuren appealed to the Fourth Circuit, the appellate court entered an order of certification, asking the Virginia Supreme Court to advise them whether the cause of action upon which VanBuren based her claim against Grubb was recognized in the Commonwealth. VanBuren v. Grubb, 471 Fed. Appx. 228 (4th Cir. 2012). After noting that it was a case of the first impression in Virginia, the Supreme Court formally although narrowly recognized the common law tort of wrongful dis-

charge in violation of established public policy against an individual who was not the plaintiffs actual employer but who was the actor in violation of public policy and who participated in the wrongful firing. 2012 Va. LEXIS 193, at *14. In a 4-3 ruling, Justice Leroy Millette, Jr., writing for the majority, stated We find Virginias existing precedent permitting such acts to be consistent with the Courts established case law regarding agency relationships . Indeed, the recognition in Bowman of a tort of wrongful discharge for public policy reasons leads to this result. Limiting liability to the employer would follow a contract construct. Wrongful discharge, however, is an action sounding in tort. Id. at *12. In her dissent, Chief Justice Cynthia D. Kinser suggested that the majority had turned the focus on the underlying wrongful conduct, rather than the wrongful discharge. Id. at *24-25 (Kinser, J. dissenting). Its a valid observation: It is reasonable to wonder if the court has opened the door for a broader array of termination-based torts in the years to come. However, over the past quarter century, the same question has been asked and answered several times. Recalling the efforts to expand the Bowman doctrine, it seems likely that aggressive plaintiffs attorneys will rely on VanBuren in an effort to broaden the exception. It also seems likely that the Virginia Supreme Court will move with caution and care if it chooses to do so. In the meantime, the case will proceed against both Grubb and the Clinic in the United States District Court for the Western District of Virginia. Like business owners throughout the Commonwealth of Virginia, Grubb, as well as the clinic, are now exposed to financial liability if the court adopts VanBurens allegations of fact.
The publisher of this newsletter is not engaged in rendering legal, accounting, financial, investment advisory or other professional services, and this publication is not meant to constitute legal, accounting, financial, investment advisory or other professional advice. If legal, financial, investment advisory or other professional assistance is required, the services of a competent professional person should be sought.
April 2013

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What the Noel Canning Decision Means for Employers

By Matthew C. Lonergan and Summer Austin Davis After the D.C. Circuit Courts ruling in Noel Canning v. NLRB, No. 12-1115, slip. op. (D.C. Cir. Jan. 25, 2013) that a majority of the NLRB members were appointed unconstitutionally, many employers celebrated the apparent demise of NLRB decisions that they viewed as unfavorable. Some of the most employer-unfriendly and controversial decisions include the following: Costco Wholesale Corp., 358 NLRB No. 106 (2012) (holding that an employers social media policy prohibiting electronic postings that damage the Company, defame any individual or damage any persons reputation unlawfully restricted employees protected rights; also adopting the Administrative Law Judges ruling that the employers rule prohibiting employee discussion of private matters of members and other employees was unlawfully overbroad). Karl Knauz Motors, Inc., 358 NLRB No. 164 (2012) (holding that an employers handbook rule prohibiting disrespectful language or any other language which injures the image or reputation of the Dealership was unlawful). Banner Health System, 358 NLRB No. 93 (2012) (holding that the employer violated the NLRA by asking an employee who was the subject of an internal investigation to refrain from discussing the matter while the employer conducted the investigation). Sodexo America LLC, 358 NLRB No. 79 (2012) (holding that an employer's off-duty access rule was inMatthew C. Lonergan is a partner with Bradley Arant Boult Cummings LLP in Nashville. He can be reached at or 615252-3802. Summer Austin Davis is an associate in the Litigation Group, resident in the firms Birmingham, AL, office. She can be reached at or 205-521-8916.
April 2013

valid because the rule granted the employer unfettered discretion to determine which employees could access the facility while off duty). Marriott Intl, Inc., 359 NLRB No. 8 (2012) (holding that the employers policy of prohibiting off-duty employees from accessing the employers property without managerial approval was unlawful). WKYC-TV, Gannett Co., 359 NLRB No. 30 (2012) (holding that an employers duty to collect union dues from employees pursuant to a dues check-off provision continues even after the expiration of the collective bargaining agreement). Alan Ritchey, Inc., 359 NLRB No. 40 (2012) (holding that unionized employers must give the union notice and an opportunity to bargain before imposing discretionary discipline involving demotions, suspensions, and terminations where the applicable collective bargaining agreement does not establish a grievance-arbitration process).

Noel Canning purports to not only invalidate all post-January 2012 NLRB decisions, but it also invalidates any action the current Board has taken or will take as long as the majority of the Board appointments are deemed unconstitutional. The ramifications of the Noel Canning decision are not unprecedented. In 2010, the U.S. Supreme Court tossed more than two years of NLRB decisions because the NLRB lacked a quorum. New Process Steel v. NLRB, 130 S. Ct. 2635. At first glance, it seems that employers can proclaim game, set, match! Right? Not quite. The NLRB has not accepted the D.C. Circuits ruling in Noel Canning, and is instead conducting business as usual. The NLRB contends that the Noel Canning decision is limited to the litigants in the case Noel Canning and the Board and other NLRB decisions are unaffected. As such, the NLRB continues to investigate complaints alleging violations of the National Labor Relations Act (NLRA) and continues to issue decisions. Litigants across the country have pounced on the Noel Canning decision in an effort to obtain relief not

only from NLRB decisions, but also from any action (or potential action) taken by the NLRB since January 2012. The U.S. Supreme Court, however, has declined to enter the fray. For example, in Healthbridge Management v. Kreisberg, Healthbridge Healthbridge applied for certiorari and requested that the Court stay a Connecticut District Court order reinstating striking workers to their former positions pursuant to the NLRA. Section 10(j) of the NLRA authorizes reinstatement of striking workers pending final action by the NLRB. Healthbridge contended in its certiorari petition that the reinstatement order should be stayed pending a determination of whether the NLRB is authorized to act at all, in light of the Noel Canning decision that arguably destroys the Boards ability to act. On Feb. 6, 2013, the Supreme Court declined to review Healthbridges petition. Until the U.S. Supreme Court decides the constitutionality of the January 2012 appointments to the NLRB, employers cannot be certain whether the appointments were lawful or whether the post-January 2012 Board decisions are enforceable against employers.

What Employers Can Do

Although the current state of our labor laws is uncertain, employers can take certain actions in view of the Noel Canning decision. 1. Appeal Adverse NLRB Rulings Made Since January 2012 Noel Canning provides employers with a basis for arguing that an adverse NLRB decision should be reversed. Until the Supreme Court weighs in on the issue, employers should consider the Noel Canning decision when deciding whether to pursue the appeal of an NLRB ruling. Additionally, employers should consider whether to pursue appeals outside the 60-day filing period. Federal Rule of Appellate Procedure 4(a)(5) permits a party to move for an extension of time to file an appeal upon a showing of good cause. Arguably, good cause exists where, as in this case, an appellate court invalidates an NLRB decision after the expiration of the time to appeal that decision. continued on page 8

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Noel Canning
continued from page 7 2. Make Sure You Understand Which Rules Are Potentially Invalid Employers should consult with counsel to gain a clear understanding of exactly which NLRB rules are invalidated by Noel Canning. Just because the rule is articulated in a post-January 2012 decision does not mean that the rule is invalid. If the NLRB can show that the rule or opinion articulated in a decision was in existence prior to January 2012, Noel Canning will probably not affect the validity of the rule. 3. Weigh The Pros and Cons When deciding whether to interpret Noel Canning as invalidating all post-January 2012 NLRB decisions and acts, an employer should weigh the potential costs and benefits of its decision. For example, an employer should consider whether the benefit of not following a rule outweighs the cost of responding to

a charge that it is engaging in unfair labor practices. On the other hand, employers should refrain from making immediate and sweeping changes to its policies in accordance with post-2012 NLRB decisions because those changes might be unnecessary if the decisions underlying the changes are declared void. Before deciding to ignore or follow decisions of the current NLRB, an employer should weigh the costs (e.g., the expense of litigating the matter against the NLRB, the potential disruption to the workplace, the costs of rewriting and distributing policies) against any benefits gained by choosing not to comply with post-January 2012 NLRB decisions. Remember, the NLRBs position is full steam ahead, and that means continuing to issue decisions that will be consistent with current precedent, including these controversial 2012 decisions. Employers should keep in mind that disputing an unfair labor practice charge and making global changes to companyagainst the deponents need for, and the relevance of, the information being sought.). Though the standard for obtaining relevant discovery from a party is low the noticing party need only show, pursuant to Rule 26(b) (1), that the deposition would lead to the discovery of admissible evidence convincing the court that the noticed officer or director lacks relevant knowledge and the deposition would therefore be a waste of time and resources remains the best route to obtaining a protective order precluding the deposition in its entirety. In Stone, even though the noticed officer was the plaintiffs direct supervisor, the court held that there was at best a slim indication of [the officers] participation or knowledge of the circumstances leading to the elimination of [the plaintiffs] position and his discharge. 170 F.R.D. at 504. This led Magistrate Judge Boyce to preclude the deposition of the noticed officer until after a Rule 30(b) (6) deposition and after a showing by the plaintiff that the officer may still provide relevant information. Id.

wide policies are costly processes and Noel Canning does nothing to mitigate those costs. 4. Understand the Risks As with all labor relations and employment decisions that implicate your companys exposure to adverse rulings and judgments, consult with counsel to determine what relief your employees might be entitled to receive if you ultimately end up on the wrong side of the Noel Canning argument.

So, what is the bottom line? Before an employer pops the cork on the champagne in celebration of what appears to be the administrative death of certain NLRB decisions (past and future), it should carefully consider the potential risks and consequences of disregarding the NLRBs decisions, which may (or may not) ultimately be deemed valid by the United States Supreme Court.

FRCP Strategies
continued from page 2 corporate official, as in this case. Id. (the noticed officer in Stone was vice president of the defendants European division in Germany). Second, the corporate official may not be a particularly knowledgeable person about matters at issue in the litigation. Id. Third, [a]n automatic obligation to produce a corporate officer for deposition pursuant to notice under Rule 30(b)(1) F.R.C.P. is susceptible to abuse. Id.

Tactical Considerations
The three concerns listed by the Stone court provide a roadmap to in-house counsel for resisting deposition notices for their officers or directors via negotiation with opposing counsel or, failing that, moving for a protective order under the balancing test standard of Rule 26. See, e.g., Flanagan v. Wyndham Intl, 231 F.R.D. 98, 102 (D.D.C. 2005) ([C]ourts generally employ a balancing test, weighing the burdensomeness to the moving party

If the noticed officer or director works for a foreign subsidiary or otherwise resides far from the litigation forum, then the organization has an additional argument to bolster the relevance point and emphasize the unfair burden and expense placed on it to produce the person for deposition. While the general rule is that the deposition of a corporate officer should be taken at the corporations principal place of business or at the deponents residence or place of business, see Salter v. The Upjohn Co., 593 F.2d 649, 651 (5th Cir. 1979), the expense of sending attorneys to depose and defend a deposition can be significant. Foreign organizational litigants have the best argument in this regard, given that the United States Supreme Court has held that American courts should exercise special vigilance to protect foreign litigants from the danger that unnecessary, or unduly burdensome, discovery may place them in a disadvantageous position. Societe Nationale Industrielle continued on page 10
April 2013

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Quarterly Review
continued from page 1 In the District of Columbia, Bill 19584, which was signed by the Mayor on Feb. 8 and which goes into effect after a 30-day Congressional review period and publication in the D.C. Register, authorized the creation and operation of Benefit Corporations. In Pennsylvania, House Bill 1616, effective Jan. 22, also authorized Benefit Corporations. Among the bills that were recently introduced and are still pending are the following: In California, Assembly Bills 434, 457 and 491 would amend provisions of the corporation law governing preferred shares, reorganizations, and emergency bylaws. In New York, Assembly Bill 942/Senate Bill 3259 would eliminate the LLC publication requirement and Assembly Bill 4946 would permit shareholders to attend meetings via remote communication. California (Senate Bill 121), Minnesota (House Bills 287 and 398), New York (Senate Bill 177), and Pennsylvania (House Bill 462) introduced bills dealing with corporate political spending. And Missouri (House Bill 510), Montana (House Bill 362), and Nebraska (Legislative Bill 168) introduced bills to authorize Series LLCs.

of the corporations only asset. The stockholder alleged that the custodian breached his statutory and fiduciary duties by selling the sole asset without either obtaining its consent or notifying it that the majority had consented to the sale. The Delaware Chancery Court dismissed the breach of statutory duty claim on the grounds of judicial immunity. The court noted that the custodian was acting under court order when he implemented the settlement by selling the sole asset. Thus, he could not be stripped of his immunity even if he had violated the corporation law by selling the asset without the consent of or notice to the minority stockholders. The court dismissed the breach of fiduciary duty claim on the grounds of laches, noting that such a cause of action must be brought within three years of accrual. Here, the cause accrued, at the latest, when the court terminated the custodianship and the stockholder filed its complaint after that date.

dence it intended to extend liability beyond 10 years. Thus, because the corporation would not be liable for suits of the kind at issue, the insurers had no obligation to pay under the insurance policies. Accordingly, the insurance policies have no value and the corporation has no undistributed assets that justify the appointment of a receiver.

CA Supreme Court: States Survival Statute Does Not Apply to Foreign Corporations
Greb v. Diamond International Corporation, S183365, decided Feb. 21, 2013, was another lawsuit filed against a dissolved Delaware corporation for injuries due to asbestos exposure. The issue was whether Delawares three-year corporate survival statute applied, which would result in the suit being dismissed, or Californias survival statute Sec. 2010 of the General Corporation Law (GCL) which did not have a threeyear time limit. The trial court ruled that Delaware law applied and the appellate court affirmed. The California Supreme Court granted review to resolve a conflict among the appellate courts over whether Sec. 2010 applied to foreign corporations. The California Supreme Court ruled that Sec. 2010 did not apply to foreign corporations. The court rejected the plaintiffs argument that Sec. 102(a) of the GCL, which provides that the GCL applies to corporations organized under the law, meant that the law applied to foreign corporations that had to qualify to do business and that were subject to various requirements which the plaintiffs characterized as organizational mandates. The court stated that had the legislature intended to impose such a litigious and intrusive scheme on qualified foreign corporations it would have made its intention clear. Similarly, the court held that a past version of the law, which stated that it applied to private corporations did not mean that foreign corporation were covered. In addition, the continued on page 10

DE Chancery Court: Receiver Not Necessary For Corporation Dissolved More Than 10 Years
In In the Matter of Krafft-Murphy Company, Inc., C.A. No. 6049, decided Feb. 4, 2013, asbestos claimants with pending claims against a corporation that had been dissolved for more than 10 years sought the appointment of a receiver. In Delaware, the Chancery Court may appoint a receiver at any time where a dissolved corporation has undistributed assets. In this case the corporations only assets were liability insurance policies it had purchased while it was in operation. Thus, the court had to determine whether the corporation was amenable to suits brought more than 10 years after its dissolution in order to determine if the policies constituted undistributed assets. The Chancery Court held that the corporation was not amenable to such suits. The court stated that while it is clear the Delaware legislature intended to extend a dissolved corporations liability for at least three years, there was no evi-

In the State Courts DE Chancery Court Dismisses Suit Against Court-Ordered Custodian
In Jepsco, Ltd. v. B.F. Rich Co, Inc., C.A. No. 7343, decided Feb. 14, 2013, a minority stockholder brought a suit against a custodian who had been appointed by the Delaware Chancery Court following a dispute over the election of directors. The custodianship resulted in a settlement agreement and the sale Sandra Feldman is a publications and research attorney for CT Corporation and a member of this newsletters Board of Editors. CT Corporation is part of Wolters Kluwer Corporate Legal Services (www.ctle
April 2013

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Quarterly Review
continued from page 9 court rejected an argument based on a past provision of the state Constitution which provided that foreign corporations would not be allowed to transact business in the state on more favorable terms than domestic corporations. According to the court, that provision merely prohibited the legislature from granting a privilege to a foreign corporation that it did not grant to a domestic corporation.

NY Court of Appeals Upholds Option Agreement

In Fundamental Long Term Care Holdings, LLC v. Cammebys Funding LLC, 2013 NY Slip Op 951, decided Feb. 14, 2013, an LLC entered into an option agreement entitling the option holder to acquire onethird of the LLCs membership units

for $1,000. The agreement provided that upon exercise of the option, the LLC shall deliver certificates for the acquired units and the acquirer shall be admitted as a member. However, when the option was exercised, the LLC responded that it could not issue membership units until the option holder provided a capital contribution of at least the fair market value of its interests. According to the LLC its operating agreement required such a capital contribution before any new members could be admitted. The LLC sought a declaration that the option holder was bound by the operating agreement. The trial court ruled in favor of the option holder, the appellate division affirmed, and the LLC appealed. The New York Court of Appeals affirmed. The court agreed with the lower courts that the option agreeshowing that they have substantive knowledge of the matters at issue in the lawsuit, the organization should argue that the party is inefficiently fishing for information, as presaged by the 1970 Advisory Committees notes, and should not be permitted to do so. Admittedly, all of these arguments face an uphill climb if an organization seeks to wholly preclude the deposition of an officer or director. However, the arguments enable an organizational party potentially to control the discovery process and, for example, force an opposing party to exhaust less burdensome discovery methods and demonstrate need before being permitted to depose hand-picked officers, directors, or managing agents.

ment unambiguously granted the option holder the right to acquire a one-third interest for $1,000. The court rejected the plaintiffs contention that the option agreement and operating agreement had to be read together as requiring a two-step process whereby first the option holder paid $1,000 for the right to acquire the units, and then made a capital contribution. The court pointed out that the option agreement and operating agreement were not inextricably intertwined. Furthermore the parties here were sophisticated and counseled and had they meant for fair market value to be due upon exercise of the option they would not have omitted that term from the option agreement.

FRCP Strategies
continued from page 8 Aerospatiale v. United States Dist. Court for the Southern Dist. of Iowa, 482 U.S. 522, 546 (1987). Finally, an institutional party must put a Rule 30(b)(1) notice in context with other discovery sought by the opposing party in the case. For example, if the organizations senior officers or directors are noticed at the outset of discovery without the noticing party first seeking Rule 30(b)(6) testimony, the organization should argue that the partys requests are premature and that less burdensome and more efficient discovery methods should be exhausted first. The Stone court explained that an institutional party may seek a protective order under Rule 26(c) to preclude a deposition of a corporate officer and, [i]n determining what relief to allow, the court can consider whether the party seeking the deposition has made an effort to obtain information under Rule 30(b)(6). Stone, 170 F.R.D. at 504. If the opposing party has issued a flurry of deposition notices seeking testimony from numerous officers and directors without any threshold

Conventional Wisdom
As Stone explained, it is court practice and interpretation that have created the concept that an institutional party must produce its officers, directors, and managing agents for deposition pursuant to deposition notice under Rule 30(b) (1). Stone, 170 F.R.D. at 502. Yet decision after decision appears to allow litigants to use Rule 30(b)(1) in precisely this manner.

The key to weakening this superficially appealing argument lies in the limits of the legal rulings and the specific facts and circumstances addressed in them. Most cases end up citing to the same handful of decisions (or decisions derived therefrom): GTE Products Corp. v. Gee, 115 F.R.D. 67 (D. Mass. 1987), United States v. Afram Lines, (USA), Ltd., 159 F.R.D. 408 (S.D.N.Y. 1994), and Sugarhill Records Ltd. v. Motown Record Corp., 105 F.R.D. 166 (S.D.N.Y. 1985). None of these courts, however, analyzed whether, under the actual text of Rule 30(b)(1), an organization can be compelled to produce a named officer, director or managing agent based on notice alone. For example, the Sugarhill decision did not cite Rule 30(b)(1) at all, relied on case law decided before the 1970 Rule amendments, and ultimately allowed the corporation to produce someone with knowledge other than the named deponent. See Stone, 170 F.R.D. at 503 (analyzing Sugarhill). In the GTE decision, the plaintiff served notice on a corporation to take the deposition of corporate employees who were not officers, directors, or managing agents, and the court noted only in dicta that continued on page 12
April 2013

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Intangible Assets
By Michael Goldman This article is the sixth installment in an ongoing series focusing on accounting and financial matters for corporate counsel. Domain names, customer lists, patents, trademarks, copyrights, trade secrets, franchises, licenses, contracts, business methods, and other forms of rights, relationships, and intellectual property have become the overwhelming items of value in many businesses today. They are a major focus area for the Business Valuation profession, but get disproportionately small attention in the accounting world.

Goodwill is probably the bestknown intangible asset. Almost every business has goodwill, because without it, business does not exist for very long. Yet, goodwill does not appear as an asset on most company balance sheets. Remember some of the accountants core principles historical cost, consistency, objectivity, and conservatism. These generally discourage the booking of self-created assets, especially assets whose value is so hard to measure. When you see goodwill on a balance sheet, that generally means that the company acquired another company and paid more than the sum of the value of identifiable assets. Goodwill is generally only recorded as a result of arm's-length transactions. Perverse Results The treatment (or non-treatment) of goodwill can lead to perverse results. Paying more than can be attributed to physical assets, in the accountants world, is considered evidence of goodwill. In the real world, it is sometimes considered evidence of stupidity. R & D Costs Research and development costs are money that the company spends Michael Goldman, MBA, CPA, CVA, CFE, CFF, is principal of Michael Goldman and Associates, LLC in Deerfield, IL. He may be reached at michaelgoldman@mind
April 2013

in the hopes of obtaining new business processes, patents, copyrights, or products. Since it is often difficult to assign specific costs to specific outcomes and there are uncertainties in identifying the extent and timing of the benefits received from these expenditures, the costs of research and development are generally expensed immediately as incurred, whether the research is successful or not. Restrictions Other intangible assets are subject to the same restrictions if they are internally created, they generally do not get recognized on the balance sheet. If they are purchased, they can get shown on the balance sheet as an identifiable asset. Thus, the billions of dollars that beer companies spend promoting their brand names during sporting events is considered to be an expense that gets written off each month, even though it is building value. Their carefully cultivated and developed brand names will never appear on their balance sheet. If, however, one beer company buys another, the acquiring company will be able to record the value of the acquired brand names on its balance sheet, even as its own internally developed and promoted brands appear nowhere on any of its financial statements . Depreciation Purchased goodwill was originally treated by accountants very similarly to fixed assets in that it was assumed that the asset would steadily lose value over time, and therefore needed to be written down each period. For fixed assets this is called depreciation. For intangible assets it is called amortization. Eventually, it was accepted in the accounting world that if management is doing its job the value of the goodwill they acquired should be increasing, not decreasing. The value of goodwill could be seriously understated by amortizing it. This shift in perspective caused goodwill to be treated more like land (which is not depreciated) than like buildings (which are depreciated). The new accounting standard became not to amortize goodwill.

Other intangible assets are amortized or not based on whether they have an identifiable life. Examples of this are the length of a patent, the expiration of an agreement, or the life cycle of a product. If the life of the asset is identifiable, than the asset gets amortized over that life. The amortization is usually on a straight-line basis, assuming the intangible loses its value at a steady rate. If the life of the asset is not identifiable, then the asset value remains the same on the balance sheet unless it becomes impaired. Intangibles are tested for impairment every year and written down whenever impairment is identified. These write-downs are a oneway street assets are never written up for enhancements in value.

To further delve into the realm of the surreal, GAAP (Generally Accepted Accounting Principles) for intangible assets is different than IRS regulations as to what gets expensed, capitalized and amortized. Different state laws may define and treat intangible assets differently from each other, both from a legal and tax perspective. Basically, what you need to know about the Intangible Asset number on the balance sheet you are looking at is that it is not comparable to any other companys Intangible Asset figure and that it is most likely understated and meaningless. In an attempt to adhere to their core principles, the accountants have missed the forest for the trees on this one. Intangible assets on a balance sheet are more of a plug to make debits equal credits than they are a true indication of value.

Business Valuation
A more specialized branch of the accounting profession, the Business Valuation community, has dealt extensively with valuation of intangible assets. Unlike GAAP accountants, business valuation analysts are not paralyzed by the uncertainty inherent in intangibility. While intangibles usually get no more than a single chapter in accounting texts, entire libraries of books have been written about them by and for the Valuation community. continued on page 12

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Insurer Guidelines
continued from page 4 Even more problematic than budget demands, some insurers purport to not pay for certain litigation activities or require pre-approval for certain litigation activities before the insurer will pay. Once again, numerous jurisdictions have disapproved of such requirements as being inconsistent with an attorneys professional judgment. For example, Washington State Bar Association Formal Opinion No. 195 (1999) provides: A billing guideline that arbitrarily and unreasonably limits or restricts compensation for the time spent by counsel performing services which counsel considers necessary to adequate representation, such as periodic view of pleadings, conducting depositions, or in preparing or defending against a summary judgment motion, endeavors to direct or regulate the lawyers

professional judgment in violation of [Washington Rules of Professional Conduct]. Op. at pg. 6. Ohio has also expressly disapproved of insurers attempts to require pre approval for litigation tasks. While it is certainly good practice to keep a defending insurer informed of significant developments in the case, such as major ongoing tasks and the retention of experts, insurers should not be able to dictate those decisions by insisting on prior approval of litigation activities approved by the client and within the professional judgment of defense counsel.


Ideally, the objectives of the corporate policyholder and its insurer should be fully aligned successfully defending the underlying litigation. Both parties want to eliminate or minimize risk and potential liability by defending a case in as legally effective and cost-efficient manner as possible. Misalignment occurs when an insurer who is reserving rights to deny coverventional wisdom and limit, or in some cases even preclude, depositions of named officers, directors, or managing agents. See, e.g., Estate of Esther Klieman v. The Palestinian Authority, CA No. 04-1173 (PLF/ JMF), 2012 U.S. Dist. LEXIS 78287, at *12-15 (D.D.C. June 6, 2012).

age simultaneously attempts to minimize or avoid its contractual defense obligations by seeking to impose its views, through billing guidelines or otherwise, on the attorney-client relationship. Too frequently, corporate policyholders (or their defense counsel) will receive insurer billing guidelines shortly after the defense of a case has commenced and allow such largely legally ineffective, and ethically questionable, guidelines to interfere with the defense effort. Although it is obviously preferable for corporate policyholders to engage in a constructive and cooperative dialogue with their insurers in defending cases, corporate policyholders should be aware that there is substantial authority reflecting that an insurers billing guidelines are nothing more than the insurers unilateral opinion that carries only marginal legal relevance to the parties defense discussions.

FRCP Strategies
continued from page 10 Rule 30(b)(1) has been interpreted to allow parties to notice the depositions of such individuals. 115 F.R.D. at 68; see also Afram Lines, (USA), Ltd., 159 F.R.D. at 413 (deciding whether noticed individuals were managing agents and not focusing on the issue of the obligation to produce). By urging a court to look beyond court practice and interpretation and to the text and intent of the rules, organizations can buck con-

Final Analysis
Upon receiving a notice of deposition for an officer, director, or managing agent pursuant to Rule 30(b)(1), an institutional party need not reflexively agree to produce the named individual. Instead, counsel should consider whether the indidamages, taxation of intercompany transactions, collateral-based financing, regulatory requirements, and even for determining the loss due to attorney malpractice. Valuation methods of intangible assets will be the subject of a later installment in this series. For now, rest assured

vidual possesses relevant information, whether his or her location or position make the deposition burdensome and expensive, and whether the notice is part of a classic fishing expedition and not part of an orderly discovery plan. Using these factors to tilt the equities in their favor, in-house and outside counsel have an opportunity to buck conventional wisdom and better protect the organization during discovery.

Intangible Assets
continued from page 10 Reasons to properly value intellectual property and other intangible assets include transaction sale support, solvency analysis, licensing, strategic alliances, infringement

that there are professionally accepted methods of valuing intangible assets that are scientific, insightful, justifiable, and defensible.

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April 2013


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