Insights Newsletter Fall 2010


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Insights Newsletter Fall 2010

  1. 1. A Newsletter from Shumaker, Loop & Kendrick, LLP Fall 20104 Tax Breaks for 6 Dodd-Frank Act 11 E-Discovery 14 Workout of 17 Recent Small Businesses Update Commercial Developments in 22 SLK News Loans Health Care ReformThe Risks and Rewards whenImplementing Electronic Medical The 15 core criteria for physiciansRecords Systems 1. Use computerized physician order entry 2. Implement drug and allergy interaction checks There’s No Such Thing As Free Money 3. Generate and transmit permissible n 2009, President Obama signed the American Recovery prescriptions electronically and Reinvestment Act (“ARRA”) designed to stimulate 4. Record demographics the American economy. Part of this bill is the Health 5. Maintain an up-to-date problem Information Technology for Economic and Clinical list of current and active diagnoses Health Act, or the HITECH Act. The HITECH Act is in part designed to stimulate the healthcare industry 6. Maintain an active medication list into switching from a paper-based medical records By Erin Smith Aebel 7. Maintain an active medication allergy list system to an electronic medical records (“EMR”) system. $17.2 billion in Medicare and Medicaid 8. Record and chart changes in vital signs incentives have been allocated to eligible providers 9. Record smoking status for patients who are “meaningful users” of EMR technology. For thirteen years old or older example, starting in 2011, physicians, hospitals and healthcare providers who are “meaningful users” of certified EMR 10. Implement one clinical decision technology will receive up to $44,000, which will be paid out support rule over a five-year period in the form of medical incentive 11. Report ambulatory clinical quality payments. The maximum payment in the first year is $18,000 measures (2011 and 2012) and bonus payments decline each subsequent year, to be phased out in 2016. 12. Upon request, provide patients with an By Douglas Cherry electronic copy of their health information On July 13, 2010, the Department of Health and Human Services (“HHS”) published its final rules on “meaningful use” and 13. Provide clinical summaries for patients for EMR standards. During the first year (Stage I) of adoption, each office visit physicians must comply with fifteen, and hospitals fourteen, 14. Capability to exchange key clinical core objectives. Eligible providers must use certified EMR information electronically software, which must include the ability to send compliant 15. Protect electronic health information electronic prescriptions to pharmacies. Providers must be able through the implementation of appropriate to electronically exchange health information with labs, hospitals, techniques providers and payees. Providers must also be able to submit clinical quality measures. Physicians must also choose five from Physicians must also choose five from a list a list of ten additional criteria to implement in 2011-2012. of ten additional criteria to implement in 2011-2012. continued on next page > 1
  2. 2. Electronic Medical Record Systems, continuedIn January 2011, clinicians may begin the Providers must be able to electronicallyninety day process of using a certified exchange health information with labs,record per meaningful use requirements. hospitals, providers and payees.Attestation begins in April 2011 and CMSpayments in May 2011. If a healthcareprovider is considering applying for thesestimulus funds, there are other legal andpractical considerations that go beyondcomplying with the “meaningful use”regulations.Implementation of EMR Systems andthe Unique Nature of Software ProjectsThe implementation of EMR systemsfrequently involves complex software andproject management considerations.Software projects often go over budgetand fail to meet deadlines, sometimes byseveral hundred percent. Resulting or implemented by the same vendor for Certain steps, or disciplines, in softwaredamages could easily run into the millions similar healthcare providers a great many system creation are designed to preventof dollars. times before, chances are low that the errors, inconsistencies, and the need forHealthcare organizations and physicians project will spin out of control in both later changes. These include a thoroughtypically consider "off the shelf" software time and expense. As the amount of initial analysis of the clients needs,or SaaS (Software as a Service) models to customization or the size of the system rigorous workflow and software design,handle separate business functions. Often, increases, the risk escalates. effective training, strict standards,its physicians and administrators want enforced methodology, and multiple Software system construction is uniqueto integrate, control, and track all levels of testing. When any of these are because software is intangible andfunctions -- from scheduling to billing to neglected to focus on system problems can be elusive. For example, ifpatient follow-up -- using one software "production," the resulting EMR system the first floor of a proposed office buildingsystem. This is typically accomplished by may be riddled with errors. is too small to support larger upper stories,selecting a core product, adding some the flaw is obvious and can be addressed Trying to implement these disciplinesspecialized programs, and creating quickly. But flaws in the early design of later in the project may actually createenough custom software to make the parts software are often not necessarily evident more errors and inconsistencies, and theoperate together. When a core product and may not be fixed until it is too late. project may deteriorate into chaos as thecannot be found, it must be custom- Any deviation from rules and procedures "to do" list grows along with the budgetdesigned or several products must be for good software selection, design, and project staff. The project enters intointegrated. It is the authors’ configuration, and testing can harm the a spiral of endless complications and goesunderstanding that there is currently no project substantially. Mistakes made early out of control. For example: data entered“one-stop” solution that addresses all in the project tend to do more damage into the system cannot be retrieved, datafacets of the healthcare process or of the than those made later. Projects that move is retrievable but corrupt, patientcore criteria listed above. rapidly (and cheaply) through early phases payments/information are lost, or billingAs a general rule, the more customized may be most at risk. What appears to be is inaccurate. At that point, the healthcarethe software or the more integration early success may actually be a sign of provider suffers losses not only fromrequired, the greater the risk that creating poor project management. having a poor system, but also fromthe new EMR system will be problematic. resulting damage to its business andIf a system has been successfully created
  3. 3. It is important to consult legal counsel • A good contract, which clarifies • If multiple vendors are used, then anearly in the process to discuss and expectations in the software implemen- overall project plan or project charterstrategize important safeguards and tation process, is key. It will clearly define should be documented and agreed uponpreventive measures to avoid the traps all parties’ responsibilities and contain a by all. The plan will articulate scope andassociated with the implementation of clear and measurable list of project approach, and clearly define measures ofthese types of projects. The attorney deliverables (tangible outcomes) and success in order to manage expectationsshould have a thorough understanding milestones. It will also detail the function for the overall project.of the software process, familiarity with and performance of deliverables, rather • It is not realistic to agree to a deliverableapplicable law (including the Uniform than using vague and immeasurable timeline without the vendor firstCommercial Code) and litigation technological terms. If deliverables or understanding the project requirements.experience in software performance milestones are not met, the penalties • Always allow for timeline flexibility.disputes. This involves the ability to should be explicitly laid out in the Most software projects go over time.identify the reasons a software project agreement. Payment should not becan fail, which include bad project upfront, but should be staggered • Understand that changes in require-management techniques, inadequate throughout the project life-cycle based ments are inevitable. “Scope creep” (thegathering of requirements, poor project on client approval of deliverables. Be change in a projects scope after the projectimplementation, and a lack of testing wary of one-page flat-fee proposals work has started) should be managedplans or technical expertise. before requirements are gathered, or a with change orders and careful processes. contract that does not account for change • Involve all members of the healthcarePreventative Measures to Avoid orders or acceptance procedures. team in the process.Common Pitfalls • “I paid for it, so I own it” is a common • Enter the implementation process withTo avoid these issues and problems, misconception in the realm of software a mindset that the EMR system shouldproject planning should be carefully copyright (and intellectual property in not just “computerize” current businessstrategized: general). Ownership of intellectual processes, workflows and procedures, but• The organization should assign or property, by default, will lie with the should improve them. The flow ofengage a project manager (PM) with a third party vendor, unless specific information in most hospitals and doctors’clear understanding and broad language to the contrary is included in offices is not as efficient as it could be.knowledge of EMR applications. This PM the agreement. Do not spend hundreds Before the implementation occurs,should work closely with the vendor PM. of thousands of dollars on a software workflows should be carefully analyzedBoth PMs should have experience with system to later discover that you only for deficiencies and improvements.multi-department and multi-vendor have a non-exclusive license to use the Everyone from the administrators to theimplementations. If the PM skill is not software with no right to modify the staff should be open to changes, as theavailable in-house, the organization system without the vendor’s approval new EMR system will surely impact nearlyshould consider engaging a third-party (which may be contingent on further every business process. No software canconsultant PM to plan and manage the payment). match all of your current methods exactly.effort. If a PM is only temporarily • Often counsel is consulted late in Taking the foregoing steps, which includeengaged, then he or she should mentor contract negotiations as an effort to get a well-defined project plan and detailedan internal resource so that the knowledge a “legal signoff” of the contract. The agreement, are important to make sureis retained, as post implementation approach is problematic as any that your EMR project is on time and onstruggles are common. recommended changes to a contract late budget.• Careful vendor selection, using a in the negotiations can raise red flags orplanned request for proposal process, is slow the process. Counsel should be For additional information, contact Erin Smithcritical. There are many resources involved as early as pre-contract Aebel at or Doug Cherryavailable regarding vendors, such as activities, such as vendor or third-party at from prior implementations. consultant selection. 3
  4. 4. New Legislation Provides Tax Breaks forSmall Businesses n September 27, 2010 of qualifying depreciable business shareholder level may want to delay President Obama property to include certain leasehold doing so until 2011. Normally, a C signed into law the improvements, restaurant property and corporation that converts to an S Small Business Jobs Act retail improvement property. corporation is subject to a special “built- of 2010 (the “Act”), in gains” tax on any asset that has a value The Act also extends additional first year which contains a in excess of its adjusted tax cost basis at depreciation for 50% of the cost of certain number of tax breaks the time of conversion if the corporation property, most notably computer and incentives for small sells the asset during the ten year period software, leasehold improvements and businesses designed following conversion. For conversions MACRS property with an applicable to spur job growth. during 2009 and 2010, the built-in gains recovery period of 20 years or less. The tax period was shortened from ten yearsThe Act seeks to encourage business special first year depreciation deduction to seven years. For conversions occurringinvestment by increasing and expanding expired at the end of 2009, but the Act in 2011, however, the period is shortenedthe election to fully deduct the cost of extends the same to property acquired to five years.certain depreciable business assets placed and placed in service in service in 2010 and 2011 under IRC Other noteworthy provisions of the Act In addition, the Act assists small businessSection 179. Under prior law, a business allow for exclusion from taxable income owners by allowing persons subject tocould elect to fully deduct the cost of of 100% of the gain on the sale of certain self-employment tax to deduct the costcertain depreciable assets placed in service small business stock, as defined under of health insurance for themselves and in 2010 up to a IRC Section 1202; the removal of cell their dependents for purposes of maximum of phones from the definition of “listed determining net earnings from self- $250,000. The property” under IRC Section 280F and employment. Previously, the cost of health deduction was an increase in deductible start-up insurance was only deductible for reduced dollar for expenditures incurred in 2010 and purposes of computing adjusted gross dollar to the extent thereafter from $5,000 to $10,000. income, not for purposes of computing the total amount of self-employment income subject to self- Of course, in this era of fiscal restraint, qualifying property employment tax. every tax break is accompanied by one placed in service or more provisions to offset the loss in By Tom Cotter exceeded $800,000 Small business owners also benefit from revenue. The most significant revenue during 2010. In the provisions of the Act that provide (1) raiser in the Act is yet another increase 2011 the maximum the general business credit for certain in the reporting requirements for business. amount that could types of expenditures under IRC Section Generally speaking, any trade or businessbe deducted under IRC Section 179 was 38 will not be subject to alternative that pays more than $600 in the aggregatescheduled to decrease to $25,000, with minimum tax for the 2010 tax year and to one payee in the course of its trade orthe dollar for dollar phase out beginning (2) the carry-back period for general business during the tax year must file anat $200,000. business credits determined in the 2010 information return with the IRS tax year is increased from one to fiveThe Act increases the maximum amount identifying the payee and the total years.deductible under IRC Section 179 to amount paid. Usually this is$500,000 in 2010 and 2011, and increases Those considering converting a so-called accomplished on an appropriate Formthe phase out threshold to $2 million. In “C corporation” that is subject to tax at 1099. Earlier this year, an importantaddition, the Act expands the definition the corporate level to a flow-through “S exception to this filing requirement was corporation” that is taxed only at the eliminated by the health care
  5. 5. legislation, which made the reportingrequirement applicable to payments madeto corporations. This will substantially • That there are millions of private businesses in the Unitedincrease the paperwork burden imposed States.on businesses, and has generatedconsiderable controversy. • A large number of these are owned by individuals who expect to retire or dispose of their business managementThe Act further expands the reporting responsibilities in 10 years or less; andrequirements for payments exceeding$600 in the aggregate during the tax year • Most of these individuals have no clearly defined businessby extending it to those engaged in rental succession plan or exit strategy.real estate activity. The new reporting A business owner may have several options for business successionrequirement is applicable to payments planning. One of these is sale of the business to some or all of themade in 2011 and thereafter. Theoretically, business’s employees.the reporting requirement will improve From the Owner’s perspective, a sale to employees may be beneficialenforcement and compliance with the tax because:laws and raise the additional revenueneeded to offset the tax breaks afforded • Employees are the best market for the business. They aresmall businesses by the Act. likely to be motivated purchasers;For additional information, contact • There is an opportunity for continuation of corporate cultureTom Cotter at and business values – continuity of operation; sale to employees keeps the business rooted in the community; and • Management transition can be thoughtfully conducted over a period coinciding with a gradual or installment sale. Two forms of business succession by sale to employees are favored in public policy and under federal income tax law the employee stock ownership plan (ESOP) and the employee cooperative. ESOP’s are fairly well known. They are subject to precise regulation and require legal counsel with particular training, skills and experience in the applicable corporate and tax issues. Employee cooperatives are less well known and understood as a vehicle for business succession, but they should always be on the “choice of entity” list for a business owner who is looking for an exit strategy. Employee cooperatives are less expensive to implement and maintain than ESOP’s, and they are more flexible in design and operation. They are not regulated as are ESOP’s, but they, too, require legal counsel with particular skills and experience in the corporate and tax matters that are unique to cooperatives. Shumaker attorneys can provide creative and well-informed counsel in the design and implementation of ESOP’s and employee cooperatives. 5
  6. 6. Brief Overview of the Dodd-Frank Act: Updating Financial Regulation n July 21st of this year, President Obama signed into law the Dodd-Frank Wall The Act grants to the FDIC authority to Street Reform and liquidate failing bank holding companies Consumer Protection and related affiliates of banks. Act (the “Act”). As most commentators have noted, the Act constitutes the most significant change tothe regulation of financial institutionssince the 1930s. This Act mandatessignificant studies and the promulgationof regulations, by some measures up to240, necessary to implement thelegislation. Significant discretion has beenshown to the banking regulators and the Securities and charter financial institutions as well. The Exchange one casualty among the banking 1. Banks and Other Financial Commission, regulators is the Office of Thrift among others, to Institutions Supervision (“OTS”), the regulators of fully implement the “thrifts.” It will be eliminated with its legislation, and it The Act generally maintains the existing principal duties transferred to the OCC will be years before structure for banking regulation, unlike for federally chartered thrifts, the FDIC we fully under- some of the original proposals that for state chartered thrifts and the Federal stand its impact. discussed extracting retribution from the Reserve for holding companies of these Federal Reserve and other regulators for institutions. While existing thrifts will be By Tom Blank Due to the length having “failed” to properly monitor and grandfathered and allowed to continue (over 2,300 pages) address the problems that existed in to exist, commentators speculate that due and complexity of financial institution oversight. The Federal to the increased penalties for violation of the Act, this article Reserve will continue to regulate bank the qualified thrift lender test and otherwill merely highlight a number of the holding and financial holding companies, tighter restrictions, many of thesemore important provisions and will be as well as state “member banks,” the institutions will convert to national banks.divided into sections referencing changes FDIC will continue to insure the deposits In addition, many commentators haveimpacting banks and bank holding of financial institutions and regulate and suggested that the other regulators willcompanies, securities reform, and oversee “non-member” state chartered penalize former OTS-charteredcorporate governance and compensation banks and the OCC will continue to be institutions due to the perceived “lax”reforms impacting public companies. responsible for the examination and regulation previously imposed upon them oversight of national banks. State banking by the OTS. regulators still will have the authority
  7. 7. The Act also creates the Financial created as a truly independent entity, but Interestingly, the Act, notwithstanding itsStability Oversight Council which was in the end, the Bureau was housed under breadth, did not deal with the resolutionestablished to protect the United States the Federal Reserve. Because of the fact of Fannie Mae or Freddie Mac. Manyfinancial system from systemic risks. that significant consumer protection have deemed this to be the greatest failingThe Council will consist of 15 members legislation already exists and is enforced of the Act noting that the projectedrepresenting banking, securities and by various bank regulatory entities, there exposure for these entities now ownedinsurance regulators with the Secretary was some question whether the new by the government ranges as high as $500of the Treasury serving as Chairperson. entity, with its proposed initial $850 billion. Apparently, attempting to reignThe principal goal of the Council is to million budget, was necessary. There is in these entities was not something thatprovide oversight for the entire financial some concern that the creation of the was politically possible in the effort tosystem of the United States. In addition Bureau will burden consumer lenders have the legislation passed this the Council, the Act grants to the and further contract the lending in this Finally, the Act permanently increased toFDIC authority to liquidate failing bank sector resulting in some parties leaving $250,000 per account the depositholding companies and related affiliates this service entirely. insurance provided through the depositof banks with significant procedural The Federal Office of Insurance (“FOI”) insurance fund. Interestingly, the increaselimitations.These two provisions were was created as a new entity housed was made retroactive to January 1, 2008,included in the Act in an effort to avoid within the Treasury Department to which will mean that depositors who lostthe type of situation created by American review insurance matters other than money in institutions resolved prior toInternational Group (“AIG”), which had health, long-term care and crop the implementation of this increase bymany different component parts and insurance. Initially, this Office of the FDIC in October 2008 (such asmany different regulators, with no one Insurance is intended to engage in IndyMac) will be protected.seemingly in charge of the entire information gathering and monitoringorganization. the insurance industry in the country as 2. Securities ReformOne of the more meaningful actions a whole. The Office is required to delivertaken in the Act is the creation of the a report to Congress within 18 months. One of the provisions in the Act thatBureau of Consumer Financial Many had pushed for the creation of a probably has received greatest press isProtection, an autonomous agency federal oversight of insurance, which is the so-called “Volker Rule” named afterwithin the Federal Reserve. This Bureau currently regulated at the state level. It Paul Volker, former Chairman of thehas been established to consolidate is unclear whether the creation of the Federal Reserve. The intent of this Ruleexaminations for consumer compliance FOI is a precursor to the federal is to limit the ability of banks and financialfor banks with $10 billion or more in regulation of insurance intending to institutions to participate in proprietarytotal assets and certain other entities preempt state authority. trading. While this is likely to impact onlyincluding mortgage brokers. The rules the most significant financial institutions The Act also reforms mortgagecreated by this Bureau will apply in the country, it will have a meaningful underwriting and provides certain anti-generally to all banks, regardless of size, impact upon those entities. Banks will be predatory lending restrictions. The intentwith enforcement for smaller banks left allowed to invest only up to 3% of their of this portion of the Act is to requireto bank regulators. While payday “Tier 1” capital in hedge funds, and may lenders to ensure that a borrower is ablelenders, check cashers and certain other not own more than 3% of any one fund. to repay a home loan by verifying thenon-bank financial firms will be To some extent, this provision attempts borrower’s income, credit history andregulated by the Bureau, auto dealers to turn back the Gramm-Leach Bliley job status (what a novel concept) andand pawn brokers escaped such legislation which effectively abolished ban payments to brokers for steeringoversight. Commentators have noted the Glass-Steagall Act in 1999. This activity customers to more highly pricedthat the impact of the Bureau could be has provided significant revenue to the of the more significant aspects of largest financial institutions in the countrythe Act. The creation of the Bureau was and there is some belief that this limitationone of the more contentious issuescontained in the legislation. For a while,it appeared that the Bureau would be continued on next page > 7
  8. 8. Dodd-Frank Act, continued accredited investor. The Act now compensation plans, and an additional specifically excludes the person’s primary 650 companies whose “say on pay” votes residence in that measure. Additionally, were mandated due to the fact that theywill cause those institutions to segregate the Act mandates that the SEC review the had participated in the Troubled Assetproprietary trading into different entities. definition of accredited investor within Relief (“TARP”) Program. The Act willDerivatives regulation is another aspect four years from the adoption of the Act mandate that companies both take theof the Act that will impact larger financial and every four years thereafter. There is vote and address in its proxy statementinstitutions. First, the Act forces to an significant concern that the SEC will move what action they will take if a majorityover-the-counter clearing market a to drastically increase the minimum net of the shareholders vote against a paysignificant portion of the derivatives worth and income tests provided in package.industry in an effort to be more Regulation D, which have not beentransparent and stable. It also requires a The standards for independence on significantly modified since its originalseparation of certain derivative or swap compensation committee members has adoption in 1982.activities from the bank itself into a non- been heightened and is similar to thatdepository affiliate. Finally, in the securities areas, and of provided for audit committees. The interest to brokers, dealers, registered committee itself, as opposed toSecuritizations also have been dramatically investment advisors and trust companies, management of the company, is requiredimpacted by the Act. Recognizing that the SEC is obligated to undertake a study to retain any outside compensationsecuritization of various assets, some of reviewing the standard of care for persons advisors. The Act provides that anywhich proved to have little or no value, providing “personalized investment Exchange (NYSE, NASDAQ, etc.) will bewas a significant contributing factor to advice” to “retail customers.” The SEC’s required to delist a company that fails tothe economic meltdown, the Act would task is to determine whether the conform to these practices within onerequire banks to maintain at least 5% of “fiduciary standard” typically applied to year.the credit risk for any securitizations. This fiduciaries and RIAs should be imposedprovision known as “skin in the game” Clawbacks have been expanded. upon brokers and dealers as opposed tois intended to make certain that Originally a result of the Sarbanes-Oxley the “suitability standard” which currentlyinstitutions are not able to make a quick Act (“SOX”) and reinforced under TARP, is imposed. Not surprisingly, this proposalbuck by securitizing worthless assets and Clawbacks will now be required of all has garnered significant comment tomoving on. Finally, the Act imposes strict executive officers, as opposed to only the the standards limiting the conflict of CEO and CFO as required under SOX.interest of credit rating agencies. The Act requires that an executive repay 3. Corporate Governance and his or her employer or former employer,Previously, Standard & Poor’s, Moody’sand Fitch were paid by the varying Compensation Reforms on a three-year lookback standard, forinvestment bankers seeking ratings for any “material noncompliance” withinstruments that they were in the process In addition to specific actions affecting financial statement preparation asof selling. This conflict of interest is financial institutions as noted above, the opposed to the higher “misconduct”deemed also to have contributed to the Act implements a number of corporate standard imposed under SOX. In the areafinancial meltdown due to the seemingly governance and compensation reforms of compensation disclosure, the Actgenerous ratings provided to now for all public companies. First, all public mandates disclosure of median pay of allseemingly worthless assets. companies will now be required to have employees compared to that of the CEO advisory (non-binding) votes taken at and requires that the proxy statement orThe Act also modifies the definition of an their annual meeting concerning pay annual report contain a chart comparingaccredited investor for purposes of private packages. In 2010, there were executive compensation to stockplacement offerings. Previously, the approximately 80 companies who sought performance over a five-year period.definition included the individual’s shareholder advisory votes regarding Some commentators have noted that thisprincipal residence in determining if he could result in a short-term, as opposedor she met the minimum $1 million net to longer-term, outlook for a company’sworth threshold to constitute an compensation practices, which may
  9. 9. be desirable. Finally, the SEC recentlyadopted regulations that would allowpersons with a greater than 3% ownershipof a public company that have maintained Supreme Court Decidesthat ownership position for three yearsor more to place nominees in the the Bilski Casecompany’s proxy statement. This proxy By Michael Myersaccess rule was to have become effectivefor larger companies in 2011 and for allsmaller reporting companies beginningwithin three years. However, due to alawsuit filed by the Business Roundtableand the Chamber of Commerce, the SECon October 4, 2010 stayed theimplementation of this new rule. It isunclear when this matter will be finallydetermined, but commentators feel thatthe rule will not be in place for the 2011proxy season.As noted in the introduction to this article,many of the provisions of the Dodd-FrankAct will be subject to interpretation,regulation and rule making for manyyears. However, as you can see from thisbrief review, the Act will have a significant Laws of nature, physical phenomena, and abstract ideas areimpact upon the financial system in the well established as ineligible for U.S. patent protection.United States. As is true with any A process, however, is eligible for protection. But, what iflegislation enacted in response to a the process is a business method, specifically a computerizedperceived systemic failure (such as SOX), method of hedging risk in the commodities market? Manythe Act may be deemed to have gone too had hoped that the U.S. Supreme Court would take thisfar in some instances, while avoiding opportunity to throw out these types of computerized methodsdealing with the Fannie Mae and Freddie and conclude they are no longer eligible for patent. Instead,Mac looming issue. Please note that there the Court concluded that the recognized standard for patentingare a number of additional provisions of software — that is, whether the process is tied to a machinethe Act not addressed in this article due or changes an article into a different state or thing, alsoto their complexity and limited known as the “machine-or-transformation (MOT) test, — ”applicability. Stay tuned for what the isn’t the sole test for deciding whether these business methods are eligible for patent consideration.regulations and rule makings do for theimplementation of the Dodd-Frank Act. Thus, the Court appears to have broadened the standard for business method patent eligibility. Although Bilski’s inventionFor additional information, contact was ultimately judged a mathematical formula and hence,Tom Blank at an unpatentable abstract idea, the Bilski holding should reaffirm the business of business method patents. 9
  10. 10. Single Member LLCs in FloridaLose Asset Protection FeatureA reason many have judgment. This rule is codified in to that risk. Until that time, those seeking chosen to form limited modern statutes that provide for the to organize closely-held businesses and liability companies over assignee of corporate shares to succeed real estate ventures as Florida LLCs would corporations to hold to all of the rights of the shareholder, do well to consider alternatives such as their assets has been the including voting rights, and creditor Florida limited liability limited asset protection feature. rights statutes, such as Fla. Stat. 56.061. partnerships, which benefit from statutes Prior to the Florida making a charging order the exclusive Supreme Court’s June In Olmstead, the Court was faced with remedy for a judgment creditor, or 2010 decision in the issue of providing the Federal Trade organizing LLCs under other states’ Olmstead et. al. v. FTC, Commission with access to the statutes that expressly provide that a 35 Fla L. Weekly S 357 defendant’s assets to allow for the charging order is the exclusive remedy,(2010), under Florida law a judgment recovery of profits from his fraudulent such as Alaska, South Dakota or Nevada.creditor of a member of an LLC who activities. The defendant’s assets weredesired to satisfy the judgment from his embedded in LLCs in which the For additional information, contact Eddebtor’s LLC interest could obtain only defendant was the sole member. Unlike McGinty at “charging order” against the debtor’s the Florida partnership and limitedLLC interest. The charging order is a lien partnership statutes, the relevant Floridaon the interest and requires distributions LLC statute did not expressly state thatfrom the LLC to be redirected from the a charging order was the exclusive member to the remedy for a judgment creditor with judgment creditor respect to a LLC interest. Consequently, until the judgment the Court ruled that a charging order is satisfied. The was not the exclusive remedy. The Court creditor could not ruled that an LLC was a type of Shumaker attorneys have extensive take ownership of corporate entity and that an ownership experience in representing clients in and sell the interest interest in an LLC is personal property defending or pursuing claims of to satisfy the reasonably understood to fall within the investment fraud. judgment. The scope of “corporate stock,” allowing the FTC to take ownership and control of For additional information, contact charging order By Ed McGinty the single-member LLC. This ruling is Michael Taaffe at remedy originated inconsistent with the general theory of or in common law to protect non-debtor the Florida LLC Act and with the Florida Peter Silverman atpartners from being forced unwillingly Income Tax Code and the Florida UCC. partnership with a creditor of a It is unlikely that the Court’s intention was to expose multi-member LLCs to Peter’s recent case was highlighteddebtor-partner. in The New York Times at this type of remedy for creditors ofBy contrast, a judgment creditor of a members. But until the law is clarified of a corporation can take and fixed by subsequent case law or, /10/business/10whistle.html?r=2&ownership of and sell the debtor’s shares preferably, legislative correction, the hpw=&pagewanted=allof the corporation to satisfy the holding nevertheless does expose them
  11. 11. E-Discovery Update: Emerging Principles Regarding Document Retention and Preservation There is no requirement that an organization save all types of ESI, nor is it cost-effective or strategically wise to do so. lectronically stored that should be considered inE information (ESI) is an developing defensible document important and valuable retention and preservation policies. source of evidence. You should also keep in mind the More than 90% of an following principles: organization’s documents are created, 1) "Disk space is cheap…lets save edited, accessed, everything" is a common communicated, and misconception stored electronically By Dawn Floyd A defensible document retention policy without ever being is grounded in principles of good-faith printed. With this trend preservation. Unless required bytowards the paperless office, there is more contract or statute, there is noto discover in an organization’s network requirement that an organization saveof servers and computers than in its dusty all types of ESI, nor is it cost-effectivefiling cabinets. How do you retain and or strategically wise to do so. Insteadmanage ESI? What ESI are you obligated of a save-all mentality, you should taketo keep? Once you anticipate litigation,what are your obligations to preserveESI? These are a few important questions By Douglas Cherry continued on next page > 11
  12. 12. E-Discovery Update, continued litigation.” The Pension Committee of the FASB Proposes Expanded University of Montreal v. Banc of America Disclosures Regarding Loss Securities, LLC, 685 F. Supp. 2d 456, 466 Contingenciesa proactive approach to document (S.D.N.Y. 2010). At this point, you shouldretention with a focus on what information immediately contact counsel, suspend Companies with audited financial statementsshould be retained, where and why it any document retention policy and put will want to stay alert this autumn for anshould be retained, and for how long. in place a “litigation hold” to ensure the anticipated final revision of the standardsConsider that everything you keep may preservation of relevant documents. Id. governing disclosure of “loss contingencies.”be potentially discoverable if relevant to Also, you should identify all key players Seeking to improve corporate financial statementa lawsuit. For instance, the informal, terse and ensure that their electronic and disclosure regarding potential losses that couldand blunt nature of emails or online posts paper records are preserved, cease the arise from pending lawsuits, regulatory actionscan be a gift to opposing attorneys and a deletion of email, preserve the records and other situations deemed to constitute “lossscourge on your organization. Also, it can of former employees that are in your contingencies,” the Federal Accounting Standardsbe very costly to have to search through possession, and preserve backup tapes. Board (“FASB”) has spent several years exploringyears (or even decades) of electronic Id. at 471. revisions to what was originally known asdocuments to respond to litigationdiscovery requests. Standard No. 5, and is now codified at Accounting 5) Failure to preserve relevant ESI can Standards Codification Topic 450. A discussion have significant consequences draft issued in June 2008 caused considerable2) A good document retention policycan save money and headaches down Failure to preserve relevant ESI can lead consternation in the legal and businessthe road to being found negligent and/or grossly communities about the expanded scope of negligent, may result in monetary disclosure. In the ensuing time, it appeared fromWith the short timetables that often come internal FASB discussions that the final FASB sanctions, and may result in an adverseabout from litigation, the urgent demands proposals would be lessened. The latest exposure jury instruction regarding spoliation ofon the parties and their information draft issued on July 20, 2010, however, revived evidence. Id. at 496-97. Sanctions maytechnology departments may be the debate. For example, the FASB proposal calls be imposed if you engage in carelesssignificant. A good document retention for disclosure of accrual amounts in the aggregate and indifferent collection efforts afterpolicy can help you quickly and efficiently through tabular reconciliation, remote the duty to preserve arises, regardlesslocate documents relevant to any litigation. contingencies that are potentially severe, and of whether there was an intentional destruction of evidence. Id. at 463. certain insurance coverage. By the August 20,3) Parties are obligated to produce ESI 2010 comment deadline, the U.S. Chamber of Developing and maintaining defensible Commerce and the Association of CorporateESI is a category of information document retention and preservation Counsel, among other notable commentators,discoverable by an opposing party, policies can be accomplished through a severely criticized the proposal, which wasregardless of how much ESI exists. If a team approach involving outside originally scheduled to take effect for issuersparty has any ESI relevant to litigation it counsel, inside counsel, management, with fiscal years ending after December 15, 2010.must be produced, even if the information and information technology personnel. Commentators have recommended, among otherexists in another form such as paper. The Legal counsel can be particularly useful things, that the FASB delay the effective date;law does recognize some exceptions to in strategizing and assisting with the however, if a final Standard revision is adoptedproduction of certain ESI, including where development of a document retention and effective according to the FASB’s proposal,production would result in undue burdens policy, determining when the duty arises companies will have considerable work to reviewand costs. However, this ESI must still be to preserve documents (either by statute, internal practices in light of the new disclosurepreserved. contract or for litigation), drafting a requirements, which will potentially affect the party’s written litigation hold notice, audit response procedures between a company’s4) If you think you might be sued, stop and ensuring that the party is meeting lawyers and its auditors.document deletion (including email) its preservation obligations under theand start preserving law of the relevant jurisdiction. For additional information, contact ReginaCourts have different standards as to when Joseph at duty to preserve ESI arises. Most For additional information, contactcommonly, the duty to preserve arises Doug Cherry at or“when a party reasonably anticipates Dawn Floyd at
  13. 13. legalupdate welcome new Federal Circuit decision may make patent infringement of certain products easier to prove when the product implements a standard Ryan D. Elliott covered by a patent. In Fujitsu v. Netgear (decided September 20, Columbus, Associate 2010), three patents covered different aspects of wireless Environmental communications technologies. Netgear was accused of contributory and induced infringement—that is, basically, knowingly providing Rachel B. Goodman a component to an infringing product when the component has no Sarasota, Associate other noninfringing use. It was asserted that Netgear infringed by Litigation implementing certain wireless networking functions, like sending and receiving messages between a router and a laptop, by not obtaining Peter E. Krebs a license from the patent holders who claimed exclusivity to the Toledo, Associatecommunications standards. The standards were adopted to ensure interoperability of Corporatethese types of devices. Richard D. RogovinNetgear dodged a holding of infringement The impact of this case may be especially Columbus, Of Counselon most of its products because notice felt in lawsuits involving contributory Corporate, Litigationletters sent to Netgear prior to the lawsuit and induced infringement involving IT.were not sufficient to establish the It would seem that infringement in the Nicholas T. Stackknowledge and intent elements of presence of an applicable standard may Toledo, Associatecontributory and induced infringement, be easier to prove. A litigant may not Litigationrespectively. need to analyze complicated code, for example, to determine and convincinglyIn what may be the most significant portion argue infringement. If a district courtof its opinion, however, the court held that construes the patent claims and finds thata district court may rely on an industry the reach of the claims includes anystandard in analyzing infringement. The device that practices a standard, thencourt stated that it still agreed that patent this can be sufficient for a finding ofclaims should be compared to the accused infringement.product to determine infringement, but ifan accused product operates in accordance For additional information, contactwith a standard, then comparing the claims Michael Myers at Shumaker attorneys regularly fileto that standard is the same as comparingthe claims to the accused product. patent applications for clients with respect to newly developed plant varieties. For additional information, contact Robert Pippenger at 13
  14. 14. I. THE PROBLEM II. HOW THE PROBLEM IS ADDRESSED legislation rendered Wachovia unable toLack of Liquidity in the Banking System defend itself against a run on its deposits. Self-Knowledge and Succinct AnalysisResults in a Tightening of Credit The takeaway from the Wachovia case Establishes a Game Plan for the Favorableand Creates a Severe Recession is that even obtaining forbearance of Workout of Existing Commercial short duration from one’s lender canThe unprecedented recession that befell Indebtedness mean all the difference in preserving thethe American economy commencing in The severe recession obviously presents value of one’s enterprise.the Fall of 2007 and from which we are the business owner with challenging issuesjust beginning to emerge has created relating to both complying with obligations III. You May Have More Influence onextraordinary problems for all commercial under existing financing documents and Your Banker than You Thinkenterprises that rely on the use of credit obtaining extensions of credit. The advice to conduct business While it would be imprudent to imply on how to deal with these issues is simple operations. The that there are magic bullets which will and direct: Self Knowledge combined with present calamity make one’s banker go away (he/she will Realistic and Succinct Analysis. manifested itself in not), the banking industry is also under a bank liquidity The best thing a pressured business owner pressure and for many reasons is freeze which can do at this juncture is to put into practice incentivized to work with a borrower reduced lending to the ancient maxim: “Know Thyself.” Do who is prudently managing its economic a trickle. The lack not engage in denial of economic realities. difficulties. Among the reasons are: of credit in turn Do not panic and delay the tough economic 1. Collateral values are in decline. If a affected general analysis that will eventually need to be By Moses Luski bank can “kick the can” down the road, economic activity, made. If it is determined that financial wait for collateral values to improve and reducing the covenants of loan documents are being avoid negative impacts to its balance revenue streams violated or that problems making loan sheets, it may do so.which businesses rely upon to pay payments are being experienced or willexisting indebtedness, including soon be inevitable, it is essential that 2. The Federal Banking Regulators, inindebtedness secured by commercial real preparations are made to proactively and a recent policy statement issued Octoberestate. This destabilizing feedback loop productively reach out to one’s banker. 30, 2009 (see Moses Luski, Mercy for thehas put both prudent and recklessly Time is of the essence in this process. An Vanquished: Federal Regulatorsmanaged businesses under extreme analogous case study which illustrates the Announce New Policy Statement oneconomic pressure which in most cases need to take swift action when there is a “Prudent Commercial Real Estate Loancould not have been anticipated. The sudden downturn in economic activity is Workouts” (February, 2010), availablediscussion which follows deals with the the demise of Wachovia, N.A. It has been at of loans secured by commercial widely commented that had TARP default.aspx?id=327, have encouragedreal estate. (Troubled Asset Relief Program) been banking institutions, in the case where enacted a number of days earlier, Wachovia loans are secured by commercial real might have survived as an independent estate, to engage in loan workouts, even bank. The short delay in enactment of this though collateral values have decreased or compliance with financial
  15. 15. have deteriorated. Where reasonablyprudent repayment terms can bearranged, banks are encouraged to work The economics of a business should beout existing loans secured bycommercial real estate. realistically and dispassionately analyzed.3. Commercial bankers may be underdeadline pressures at the end of eachquarter to evaluate their loan portfolios.If they are surprised by last minutedisclosures or reporting at the very endof a quarter, they may be less likely tobe predisposed to work with a borrowerto restructure a loan. On the other hand,if a borrower proactively reaches out tohis banker earlier in the quarter to givea “heads up” of potential restructuringissues, a banker is more likely to workharder to obtain a mutually favorable • Have a management plan ready. help your bank more easily justify therestructuring. Indicate to the banker, as part of a fully proposed workout plan. Also, when documented plan, the changes being dealing with less experienced bankIV. Practical Advice made in current business operations to personnel, an experienced consultant can weather the storm and how in the interim in effect educate the bank on how toArmed with the general knowledge the business can support the existing structure a solution. An attorney or CPAgained from the discussion above, a payment schedule or a reduced payment can also assist with this process. At theborrower seeking to work out a loan schedule. Alternatively, outline an exit minimum, the attorney should bewith its banker should heed the strategy showing what preparations are consulted prior to execution of any legalfollowing practical advice: being made for a sale of the business. documents to insure the documents• Faithfully comply with all reporting The latter alternative may be less realistic properly capture the business terms ofrequirements such as the provision of in today’s economic climate, but may be the deal and do not overreach to one’stax returns and financial statements. a viable approach depending on the line detriment. A CPA must be consulted toFailure to comply with these of business. This is where the savvy and determine that there are no adverse taxrequirements immediately raises a red expertise of the business owner can “buy” consequences to the proposed workoutflag with the bank officer who is some time for the enterprise and possibly transaction and to suggest whether thereresponsible for the loan who may in be its salvation. In essence, sell the banker are more tax-efficient means of structuringturn flag the loan as potentially troubled. with reasonable projections and realistic the transaction. planned actions, showing the business• Approach your banker with any • Personal expenses should be carefully stands a reasonable chance of weatheringpotential loan issues well before the monitored. If personal expenses and/or the storm.point of missing payments. Once withdrawals from the business are out ofpayments are missed, the bank is less • Consider consulting with a workout control, it will not be looked uponcapable of flexibility with respect to a specialist. There are former bankers who favorably.potential loan workout. This is where consult with businesses and assist themthe term “Know Thyself” has its highest with developing a plan that can be soldapplicability. If business conditions are to the bank. A capable consultant canrapidly deteriorating, prior to reaching inject a very useful level of legitimacy tothe point of no return, the economics of the workout process in that it establishesa business should be realistically and a banker-to-banker dialogue which candispassionately analyzed. continued on next page > 15
  16. 16. Know thyself, continued • For owner occupied real estate, the bank • If a business analysis indicates a might rely on the cash flow of the business borrower’s business cannot be saved, to provide a long term refinance without then it is probably better to know thisV. WORKOUT TERMS: requiring a reduction in principal. sooner rather than later and bankruptcyWhat to Expect counsel should be consulted. VII. A Word on Loans that are Part of aThere are numerous ways to restructure • If things appear bleak or out of control, Commercial Mortgage Backed Securitya loan: (a) Interest Only Period; remember the mantra: “Know Thyself (CMBS)(b) Modified Amortization; (c) Reduced and It Will Work Out.” Facing the stormInterest Payment with accrual of shortfall • If your loan is part of a CMBS, in order with a calm focused demeanor will yieldand excess cash flow recapture; to trigger workout negotiations it may be a better result than disorganized panic.(d) Restructure into a “good” A Note and necessary to stop loan payments to triggera “bad” B Note; and (e) Negotiated what is known as a “special servicing For additional information, contact MosesEquity Participation where the bank is transfer event.” Once such a special Luski at to recoup deferred interest and servicing event is triggered, one is put inprincipal payments upon a sale or contact with a servicer that has authorityrefinance event. The complexity of some to make decisions on behalf of the ownerof these structures suggests the need to of the CMBS. Caution: “Please don’t try thishave a capable consultant or other at home.” Cessation of loan paymentsprofessional provide advice on which should only be made with the advice ofstructure is more advantageous. legal counsel. • The typical term for a CMBS loanVI. What Terms to Expect on a extension are maintenance of the sameRefinance interest rate, one year term extension, 5• Since most real property collateral is percent principal reduction and anunder water, a loan extension will more origination fee of one to two percent.than likely be offered rather than a long Again, there is no guaranty that these termsterm refinance. The term of the exten- may be achieved in a particular case.sion will typically not exceed one year.The interest rate will most likely be VIII. Final Takeawaysincreased with a base floor set and a • In order to successfully negotiate a loanwider spread from the variable base rate. workout, a borrower must be able toThe bank may ask for a fee ranging from frankly communicate to the bank what the25 basis points to 200 basis points. problems in the business are and whatObviously, in any given case, the actual efforts the borrower is taking to mitigateterms of the extension will be the result the problems. If the bank sees that theof negotiations based on a unique set of borrower is making significant efforts tofacts so there are no typical terms other help itself, there is a much greaterthan to state it is unlikely that the term likelihood of bank cooperation.will be extended for more than one year. • Sometimes the pressures facing a• For a Real Estate Investment Property, particular banking institution are so greatthe chances for a longer term refinance that it will have little flexibility inincrease greatly if the borrower can inject negotiating a workout. Similarly, if aequity to bring down the loan to value banking institution sells a portfolio loanand there is sufficient rental income to to a third party, such party may have lessservice the debt. interest in
  17. 17. 17Recent Developmentsin Health Care Reform ith new 2. New Claims and Appeal Procedures.W Grandfathered Plans regulations Effective for plan years beginning on issued on a The Act imposed numerous new or after September 23, 2010, the required regular basis requirements on the design and operation claims and appeal procedures and conflicting of group health plans; however, group applicable to group health plans has and unclear health plans maintained in existence prior been expanded to include new rights descriptions of to the adoption of the Act may be exempt for participants, including an external health care from certain requirements as review or disputed claims by a third- reform in the "grandfathered" health plans. The new party independent review organization. news media, interim regulations 3. Prohibition on Discrimination in employers are illustrate the Favor of Highly Compensatedat a disadvantage in determining and requirements for Individuals. Effective for plan yearsunderstanding their obligations under a group health beginning on or after September 23,the new health care laws, as well as plan to meet and 2010, the prohibition against a groupidentifying the available opportunities. maintain "grand- health plan discriminating in favor of fathered" status.The President signed the Patient highly compensated individuals (eitherProtection and Affordable Care Act on In general, a group in the form of eligibility or benefits) isMarch 23, 2010, and subsequently health plan may be extended to apply to all group health By Scott Newsom a "grandfathered" plans. Previously, the prohibition onlysigned the Health Care and EducationReconciliation Act seven days later health plan if it applied to self-insured group health(collectively the “Act”). Initially, the provided health plans.application and effect of some insurance coverage to any individual on However, despite the exemption fromprovisions of the Act remained unclear March 23, 2010 and has continually complying with some requirements ofpending mandated descriptive and covered any (not necessarily the same) the Act, including those listed above,implementing regulations. Anticipated individual since that date. Grandfathered a "grandfathered" health plan mustregulations and guidance have begun health plans are not required to comply comply with some of the more knownto emerge, including interim final with some design and operational provisions of the Act, including:regulations governing "grandfathered" requirements mandated by the Act,health plans, and interim regulations including: 1. Required Coverage for Adultand additional formal guidance Dependents. Effective for plan years 1. Coverage of Preventative Healthexpanding required internal claims and beginning on or after September 23, Services. Effective for plan yearsappeal procedures applicable to health 2010, any group health plan that offers beginning on or after September 23, 2010insurance claims to include an external coverage to dependent children must (i.e. January 1, 2011 for calendar yearreview process. These recent develop- make the coverage available to plans), a group health plan may notments are among the first publication dependent adult children until they impose cost-sharing requirements (i.e.of regulations interpreting and reach the age of 26 years. To accom- co-payments or deductibles) for certainimplementing the Acts provisions, and modate this change, the exclusion from identified preventive care services.require immediate consideration andanalysis by sponsors of group healthplans. continued on next page >
  18. 18. Health Care Reform, continued 5. Prohibition Against Rescission. Effective for plan years beginning onincome for employer provided health or after September 23, 2010, a groupinsurance coverage has also been health plan is prohibited from rescindingamended. However, for plan years coverage (termination of coveragebeginning prior to January 1, 2014, retroactively) unless an individualcoverage may be restricted to adult engages in an act, practice or omissionchildren who are not eligible for other constituting fraud or an intentionalemployer sponsored group health plan misrepresentation of material fact ascoverage. prohibited under the plans terms. A2. Prohibition Against Pre-Existing permissible rescission will require a 30Condition Exclusions. Effective for plan day advance written notice. Retro-activeyears beginning on or after September termination of coverage is permitted for23, 2010, a group health plan may not failure to pay premiums.impose a pre-existing condition To maintain grandfathered status, aexclusion on any individual under the group health plan must include a noticeage of 19. Effective for plan years in all participant communicationsbeginning on or after January 1, 2014, describing benefits that alerts thethe prohibition against pre-existing participant that the plan is considered aexclusions is extended to include all grandfathered plan. The regulationsindividuals. provide sample language that may be3. Prohibition Against Lifetime or used to satisfy this requirement.Annual Limits on Essential Health In addition, substantive restrictions and 1. Any elimination of all or substantiallyBenefits. Effective for plan years limitations exist on the changes that a all benefits to diagnose or treat a particularbeginning on or after September 23, grandfathered plan may make and still condition.2010, a group health plan may not maintain its exempt status from the Act.establish lifetime limits or annual limits 2. Any percentage increase in any cost- As health insurance renewal seasonon the dollar value of essential health sharing requirement (such as coinsur- commences for many employers, thebenefits for any participant or ance). most notable restriction is that any newbeneficiary. However, effective for plan policy, certificate or contract of insurance 3. Any increase in a fixed-amount cost-years beginning before January 1, 2014, entered into after March 23, 2010 results sharing requirement other than a a group health plan may impose in a loss of grandfathered health plan copayment (such as a deductible or out-"restricted" annual limits on essential status. For example, many employers of-pocket limit) in excess of the "maximumhealth benefits as determined by often change health insurance providers percentage increase" (medical inflation +regulations to be issued. after a comparative shopping process as 15%) measured from March 23, 20104. Waiting Periods Cannot Exceed 90 a means of controlling premium costs. through the effective date of the increase.Days. Effective for plan years This process will now result in a loss of 4. Any increase in a fixed-amountbeginning on or after January 1, 2014, grandfathered status. Notably the copayment, determined as of the effectivea group health plan may not impose a Department of Labor has issued date of the increase, if the total amountwaiting period of more than 90 days Frequently Asked Questions, in which it of the increase measured from March 23,for an individual to become eligible states that further guidance will be 2010 exceeds the greater of:for coverage. forthcoming on this issue. (a) An amount equal to $5 increased by Other changes that cause a group health "medical inflation." plan to lose its grandfathered status include: (b) The "maximum percentage increase" determined by expressing the total increase in the copayment as a