Matt Morley
Carol Elder Bruce
For more than two decades, U.S. law enforcement authorities have sought to encourage companies to establish corporate compliance programs to detect and prevent illegal conduct by corporate personnel, and to self-report potential violations they identify. The Securities and Exchange Commission has been in the forefront of these efforts, offering companies the prospect of reduced sanctions in connection with self-identified and self-reported violations.
The new Dodd-Frank whistleblower provisions threaten to undercut these longstanding initiatives by offering substantial payments to persons who are the first to report previously unknown information about possible corporate misconduct to the SEC.
These bounties create powerful incentives for employees to bypass corporate compliance programs altogether and to report their concerns directly to the SEC—leaving in-house counsel less likely to learn of these issues or identify potential legal violations before the SEC does. Since self-reporting credit is ordinarily given only for information previously unknown to the authorities, companies are less likely to be able to obtain such credit.
The Dodd-Frank whistleblower provisions, codified as Section 21F of the Exchange Act, require the SEC to pay bounties to persons who provide information leading to a successful securities law enforcement action, in which more than $1 million is recovered. Bounties will range from ten to 30 percent of the total monetary sanctions obtained by authorities, with the precise amount to be determined unilaterally by the SEC.
Whistleblowers are not required to inform the company of their concerns at any time, and almost anyone can be a whistleblower, including current or former employees, spouses, consultants, or competitors. Whistleblowers can submit tips anonymously by acting through counsel, and their identity may never be publicly known. Even persons bound by fiduciary duties or ethical obligations can, under certain circumstances, become eligible to receive a bounty for reporting to the SEC.
For example, compliance and internal audit personnel are ordinarily ineligible for bounties, but may qualify if they have a reasonable basis to believe that disclosure may be necessary to prevent substantial injury to the company or its investors, or if the company fails to report a violation to the SEC within 120 days after learning of it. Whistleblowers can even qualify for an award if they obtained their information in breach of civil or criminal law, unless they are convicted of a criminal violation in connection with obtaining the information.
SEC investigations arising out of whistleblower tips may prove more difficult to handle than staff-initiated inquiries, given the potentially active involvement of a financially motivated whistleblower who may push the SEC to undertake investigative steps that it might not otherwise pursue. Indeed, it seems likely that SEC investigations arising from whistleblower complaints will receive a disproportionate amount of staff attention and resources, given the importance of the program and the staff’s sensitivity about previous failures to heed whistleblowers. These factors may also make such investigations, once initiated, more difficult for the staff to close.
Dodd-Frank’s whistleblower provisions ensure that corporate decisions regarding self-reporting will be made under even more uncertain conditions than in the past. It remains the case that in most circumstances, except for highly regulated entities, there is typically no affirmative obligation to report potential violations of the federal securities laws to the SEC, and part of any self-reporting decision is an evaluation of the likelihood that the authorities will learn of the violation, among other factors. Companies can now expect to have less time to decide whether to self-report, and face greater risks that a whistleblower will report them if they do not report themselves.
While there is no sure way for a company faced with a securities violation to ensure that it will not become the subject of a whistleblower report, it can minimize the risk of a whistleblower making a first report to the SEC by communicating a strong, ethical tone from the top, and creating an environment of mutual trust and respect with its employees in which a “culture of compliance” is more than simply a slogan. In these circumstances, employees may be more likely to report concerns to the company first.
Another way to encourage employees to voice their concerns within the company is to ensure that the company has effective reporting systems through which company personnel can communicate concerns about potential wrongdoing; that those systems are well publicized and easy to use; and that the company encourages individuals with concerns to bring them to the company’s attention. This message can be reinforced by assurances that employees will not suffer adverse consequences for reports made in good faith, even if they are erroneous, and with procedures to address any concerns the individual may have that he or she will later become the subject of such retaliation.
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Stuart Levey
In his third week on the job, Stuart Levey, the new chief legal officer at HSBC Holdings Plc, has his hands full as Europe’s largest bank faces scrutiny by numerous U.S. agencies.
Observers think the London-based bank hired Levey, 48, to boost its credibility with U.S. law enforcement, as well as for his understanding of U.S. finance laws. He served as the first under secretary for terrorism and financial intelligence in the U.S. Treasury Department from July 2004 to February 2011, under Presidents George W. Bush and Barack Obama. Prior to that, he held a key post at Justice, as the principal associate deputy attorney general.
But Levey, who took on the HSBC job on January 13 and will be based in London, knew what he was getting into.
A U.S. subsidiary, HSBC Bank USA, disclosed in its quarterly report [PDF] to the Securities and Exchange Commission in November that HSBC is “the subject of ongoing investigations, including grand jury subpoenas and other requests for information, by U.S. government and state agencies, including the U.S. attorney’s office, the U.S. Department of Justice, the U.S. Senate Permanent Subcommittee on Investigations, the Securities and Exchange Commission, and the New York County District Attorney’s Office.”
In April of 2011, the IRS asked for and received records from HSBC that identified U.S. taxpayers with bank accounts at the India offices of an affiliate, The Hongkong and Shanghai Banking Corporation.
In a statement, HSBC said the investigations are “at an early stage” and pertain to the bank’s compliance with the Bank Secrecy Act, anti-money laundering laws, and the Office of Foreign Assets Control, as well as U.S. tax reporting requirements by its customers.
“In all cases, we are cooperating fully and engaging in efforts to resolve these matters,” the company said.
The Senate subcommittee is looking at the bank as part of a money-laundering inquiry. Reuters reported last week that the inquiry “could yield a report and congressional hearing later this spring.”
In addition, HSBC said it has received three subpoenas from the SEC seeking information about its residential mortgage-backed securities transactions, and one from the DOJ related to mortgages.
Previously HSBC Bank USA and its indirect parent, HSBC North America Holdings Inc., reached agreements in 2010 with the Office of the Comptroller of the Currency and the Federal Reserve Board for compliance reforms under the Bank Secrecy Act and anti-money laundering laws.
As stated in the SEC filings, the bank has been engaged in ongoing discussions with officials, including the Senate subcommittee, on a number of regulatory and compliance matters. “The nature of these discussions is confidential. In all cases we are cooperating,” the company said.
In a statement last week, bank spokesman Robert Sherman said, “HSBC takes compliance very seriously. We support U.S. efforts to strengthen anti-money laundering defenses and protect the integrity of the financial system through our rigorous new internal processes and through our close working partnership with regulators and law enforcement.”
Sherman said Levey wasn’t available for comment. As the first terrorism undersecretary, Levey has been called the architect of the post-9/11 strategy of using the U.S. financial system to fight terrorists and to pressure Iran over its atomic ambitions. He left the undersecretary’s post in January 2010, and most recently served as senior fellow for national security and financial integrity at the Council on Foreign Relations.
At HSBC, Levey joins Richard Bennett, group managing director and group general counsel, during a transition period. Bennett is to retire from HSBC after 33 years of service at the end of 2012, but will continue as a part-time adviser.
HSBC chief executive Stuart Gulliver said: “I am delighted Stuart [Levey] is joining HSBC after a distinguished career in private practice and government service. His experience dealing with international financial and legal issues is highly relevant to a global bank.”
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Howard Dean and Michael Steele
Photo: John Disney, Daily Report
Despite the public perception that Citizens United opened the floodgates for unlimited corporate money in federal elections, McKenna Long Aldridge’s Stefan C. Passantino and the former chairmen of the Democratic and Republican National Committees advised corporate clients to proceed with caution at an event the firm held Wednesday on campaign finance in the wake of the two-year-old Supreme Court decision.
Having to disclose contributions, which currently can be made anonymously to super PACs, “is what everybody is concerned about,” said Passantino, who heads McKenna’s political law team and is national counsel for Newt Gingrich’s presidential campaign. “The real issue is not that anyone thinks they can put the toothpaste back in the tube—it’s transparency.”
The Federal Election Commission has not instituted regulations for super PACs but other federal agencies likely will, said Passantino.
Howard Dean and Michael Steele, the respective former chairmen of the DNC and RNC, also did not view Citizens United as a golden opportunity for corporations to fund candidates and lobby for their issues.
“I say don’t give money to either party,” said Dean, a senior strategic advisor at McKenna.
Steele agreed with his former counterpart. “Get yourself a good lawyer or, like Howard said, don’t give any money,” he said.
The problem is that the repercussions are still unknown, said the two former party chairmen. Super PACs can act unpredictably, and intense scrutiny of their activities by the media and an angry public means a donation can come back to haunt a corporate donor, they said.
“This is a very, very rough game,” Dean said of current politics. He pointed out that a minority speaker in Congress could become a committee head later on. “People read campaign finance reports. It’s hard to get an appointment with someone when you gave money to make sure everyone knew they had a mistress in 1994 or 1996. People don’t forget that.”
“What really ticks people off, particularly those on the left, is the non-disclosure provision,” said Steele. “Prior to McCain-Feingold,” he said, “all this money floating around out here right now would have come to the RNC or the DNC—and we would have to disclose under FEC rules.”
“Citizens United has fundamentally changed the landscape,” said Passantino, but no one knows how disclosure rules will play out. “We are in a mess that is still unfolding and we don’t know what is going to happen. The last thing [corporations] want to do is mess up [their] brand.” (He noted that his remarks reflect his opinions, not those of his clients.)
In this climate, contributing to super PACs is risky because of the intense scrutiny from the public and the media, Passantino agreed. “It’s not as easy as the media and the pundits think,” he said.
The participants pointed to Gingrich’s win in the South Carolina Republican primary as a prime example of the unforeseen effects of Citizens United.
A last-minute infusion of $5 million by casino billionaire Sheldon Adelson to Winning Our Future, a super PAC backing Gingrich, allowed Gingrich to blanket the state with TV ads and defeat Mitt Romney—after seeming on the ropes after his losses in Iowa and New Hampshire. Adelson has just contributed an additional $5 million to Winning Our Future ahead of the Florida primary, according to media reports.
“Citizens United has fundamentally changed politics—and it has bitten the Republicans first,” said Dean. “When one candidate can spend $10 million and bring a candidate to his knees, that fundamentally changes things.”
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The public relations firm Greentarget LLC released a survey in 2010 regarding the use of social media by in-house counsel that has shaped strategy of law firms across the United States. This morning, the firm released its New Media Engagement Survey findings for 2011. The results were somewhat surprising.
The survey, conducted with the Zeughauser Group and Inside Counsel, found that, across all age groups, more than 50 percent of in-house counsel reported using LinkedIn during the past week — and many within the past 24 hours. Only one group showed a decline — lawyers aged 30 to 39. In 2010, 84 percent of lawyers in that age group reported using LinkedIn during the past week; in 2011, their use declined to 65%.
“The days of the younger ‘power users’ is quickly fading as older counsel are using social media tools with greater fervor and frequency than they were just 18 months ago,” said John Corey, Greentarget’s founding partner.
Law firm blogging has also seen huge gains in terms of credibility and its ability to persuade legal departments, the survey found. Fifty-five percent of the general counsel surveyed said blogs influenced their hiring decisions, and 76 percent attributed importance to a lawyer’s blogs when hiring outside counsel.
So how should law firms respond to these findings? First, by recognizing that blogs and social media are here to stay.
“Lawyers need to learn social media. It isn’t the future. It is here now,” Janine Dascenzo, associate general counsel for General Electric Co., said during the recent Hildebrandt Marketing Partner Forum. Her fellow in-house counsel agreed unanimously during a panel discussion that general practice e-mails were out and Twitter and blogs were in. “We are inundated with so much e-mail, it makes our lives so much easier if we can view the information through blogs and Twitter,” she said.
According to the survey, if in-house counsel don’t comment or start conversation with regards to your content, that doesn’t mean they aren’t reading. Most in-house lawyers are reading but choose not to interact; while 86 percent of in-house counsel use social media, 68 are lurkers.
William Sailer, a senior vice president and legal counsel at Qualcomm Inc., echoed this sentiment during the panel discussion. He uses blogs and social media to educate himself, not to start conversations, he said.
That should be encouraging for bloggers — the fact that nobody comments on your blog doesn’t mean your efforts are being ignored.
My recommendation to firms has always been to go where the clients are. If clients and potential clients are reading blogs, start writing. Firms that create high-quality blog content on a regular basis will find success with in-house counsel. The same goes for Twitter — especially among high-adopter clients in the technology, media and green industries.
A marketing director of a white-shoe firm asked me, “Do you know of any situations where a client left a firm that didn’t have a blog for a firm that did?” Although I didn’t know of a specific example, these survey results suggest that the time is coming. Writers of high-quality blogs are impressing their in-house counsel readers, and it is only a matter of time until your clients approach them with work. You may be tired of hearing about social media, but these tools aren’t going anywhere. It’s time to start using them.
Adrian Dayton is an attorney, social media consultant and co-author with Amy Knapp of LinkedIn Blogs for Lawyers: Building High Value Relationships in a Digital Age (West Publishing 2012). You can learn more about him at http://adriandayton.com or by following him on Twitter @adriandayton.
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Do general counsel have a responsibility to closely supervise rogue employees? In the case of former Ferris, Baker Watts, Inc. general counsel Theodore Urban, the Securities and Exchange Commission says: Well, maybe. Or maybe not.
In a case that many hoped would clarify how the SEC views the duties of general counsel, the charges against Urban, for failing to properly supervise a broker were dismissed Thursday [PDF].
And it left the big picture of the SEC’s views as cloudy as ever.
That’s because the dismissal came after the only two participating commissioners split on whether the allegations were established. Under commission rules, a majority must agree on the disposition of a case or it is dropped. So call it a tie.
It all started when Urban, then GC and a member of the board of directors of FBW, recommended firing a troublesome broker. The broker’s top supervisor, who was also vice chair of the board, said not to, and volunteered to closely supervise the employee instead.
The broker, however, went on to commit criminal securities violations, to which he later pleaded guilty. In September 2009, SEC lawyers charged Urban with failing to reasonably supervise that broker.
The SEC attorneys argued that once Urban saw the red flags raised by the broker’s conduct, the GC was obligated to respond vigorously. They suggested Urban should have taken his concerns to the board of directors, and not given in to the supervisor’s pressure.
But Chief Administrative Law Judge Brenda Murray disagreed and dismissed the case [PDF] in September 2010.
Murray said that “almost all the business leaders at FBW either lied to Urban or kept information from him, and people with clear supervisory responsibility over [the broker] did not carry out their supervisory responsibilities.”
Wanting to hold Urban accountable, the SEC lawyers appealed Murray’s decision to the full commission.
In the order accepting the appeal [PDF], the commissioners said they would examine the case because “the proceeding raises important legal and policy issues, including whether Urban acted reasonably in supervising [the broker] and responded reasonably to indications of his misconduct; whether securities professionals like Urban are, or should be, legally required to ‘report up’; and whether Urban’s professional status as an attorney and the role he played as FBW’s general counsel affect his liability for supervisory failure.”
For unspecified reasons, three of the commissioners decided not to participate in the final decision. An SEC spokesman said Friday that disciplinary proceedings like this one are closed, and commissioners are not required to state why they declined to take part.
And that decision by an incomplete panel leaves the tricky question of a GC’s responsibility to supervise open for another day.
When asked to comment on the SEC’s announcement, Urban said he was “absolutely delighted by the decision.”
Urban was general counsel at FBW from 1984 until he left in 2007. According to his profile on Linked In, Urban has been a securities industry consultant outside Washington, D.C., since March 2007.Previously, Urban had served on the legal staff of the SEC, as well as with the Commodities Futures Trading Commission.
FBW was a well-known regional broker-dealer in the mid-Atlantic area. It was acquired by the Royal Bank of Canada in 2008 and now operates under the name RBC Wealth Management.
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Chief Judge Randall Rader
“A catalyst for leading all civil litigation in the United States.” With these words Federal Circuit Court of Appeals Chief Judge Randall R. Rader described the Patent Pilot Program in his remarks to a packed gathering of the bench and bar of U.S. District Court for the Northern District of California last week. Rader was the keynote speaker at a program hosted at Stanford Law School on Jan. 18, 2012, addressing the Northern District’s Patent Pilot Program. The Director of the Administrative Office of the United States Courts designated California’s Northern District as one of 14 districts chosen to participate in the pilot program.
The Pilot Program’s statutory goal is to “encourage enhancement of expertise in patent cases among district judges.” The Pilot Program has been one component of the patent reform debate since, at least, 2006. Speaking in 2009, Rep. Lamar Smith, R-Texas, said that “it is widely recognized that patent litigation is too expensive, too time consuming, and too unpredictable. [This legislation] addresses these concerns by authorizing a pilot program in certain United States district courts to promote patent expertise among participating judges.” 155 Cong. Rec. H3457 (March 17, 2009)
Rader enthusiastically embraces the opportunities he sees arising from the Pilot Program, particularly when it comes to reducing patent litigation expenses. He travels widely throughout the U.S. and internationally and is often asked whether “the benefit is worth the cost” when it comes to the “extensive and expensive discovery” in U.S. civil litigation. According to Rader, the Patent Pilot Program paves the way for the “patent system to lead to an economically defensible adjudication model” and he believes that the “first thing to address is more effective ways to reduce the cost of discovery.” If patent litigants in the Pilot Program can manage discovery efficiently without vast expense, Rader believes that this will be “the tip of the spear” in improving all U.S. civil litigation.
Rader cites the Federal Circuit Advisory Committee’s Model Ediscovery Order (reported in Law Technology News‘ article “The Elephant in the Patent Courtroom“) as one component of the patent bar’s leadership in reducing discovery costs. He expects that judges and practitioners can build on these efforts through the Pilot Program. Rader announced that he intends to invite all 79 judges and magistrates that are participating in the program to the Federal Circuit Judicial Conference in May to discuss patent litigation improvements. According to Rader, developing patent discovery best practices is “step one” in creating a more efficient and less costly dispute resolution model.
In his speech to the Northern District of California, Rader demonstrated once again that he is a relentless advocate for improving patent litigation and, in turn, civil litigation. He is passionate in his view that reducing litigation costs by limiting discovery burdens through the Patent Pilot Program is the most critical first step on the path to reforming patent litigation in the United States.
Mark Michels is the former litigation manager and discovery counsel at Cisco Systems.
This article originally appeared in Law Technology News.
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The former general counsel for a union of State Thruway employees has been indicted for allegedly stealing more than $211,000 from the union by filing false receipts for continuing legal education courses, legal reference materials and copying and mailing services.
Kevin Clor, a University at Buffalo School of Law graduate admitted to the bar in 2000, faces two charges of second-degree grand larceny, 16 counts of second-degree criminal possession of a forged instrument and 16 counts of falsifying business records in the first degree.
Mr. Clor pleaded not guilty at his arraignment on Jan. 25 before Manhattan Acting Supreme Court Justice Carol Berkman, who set bail at $75,000.
Read the indictment, the government’s statement of facts and voluntary disclosure form.
The top count of second-degree grand larceny, a class C felony, carries a sentence of five to 15 years.
According to the Manhattan District Attorney’s Office, Mr. Clor submitted for reimbursement 150 false receipts to New York State Thruway Employees Local 72 from January 2006 though last May. His arrest stemmed from an internal probe by the Manhattan-based union, which represents 2,500 full-time and part-time workers, including toll collectors, grounds workers, janitors, painters and carpenters.
As general counsel from January 2001 to April 2011, Mr. Clor worked from his Buffalo home. His responsibilities included representing members at arbitration hearings and disciplinary and grievance proceedings.
An online profile indicated that Mr. Clor worked for the firm of Steven J. Baum P.C. as an associate after he left the union last year.
Prosecutors claim Mr. Clor sought reimbursement for $30,000 for CLE courses from the International Foundation that he neither attended nor paid for.
They also claim he sought reimbursement for $23,000 worth of CLE classes given by the Nichols School—a private middle and high school that does not offer CLE. Instead, prosecutors allege Mr. Clor twice rented the hockey rink at the school, which is near his Buffalo home.
Prosecutors also charged that Mr. Clor sought reimbursement for more than $48,000 in CLE courses taken through the “Education Certification Department” of the state’s Department of Civil Service.
Yet the Department of Civil Service operates no such department and the address listed on the receipts is not a proper Department of Civil Service address.
Mr. Clor did not receive CLE credits for any of the courses he said he had taken. His state attorney registration is current through November.
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Veta Richardson
Illinois is in danger of becoming a state where corporate lawyers and their clients will no longer be able to have open conversations about complex issues, the Association of Corporate Counsel warned Wednesday in a brief filed with the Illinois Supreme Court [PDF].
Unless the state’s Supreme Court overturns it, a lower court ruling waiving attorney-client privilege “will undermine the public policy interests of the legal profession in Illinois, create an impossible environment for business negotiations in Illinois, and unfairly place lawyers into a mine-field of ethical conflicts and potential malpractice claims,” the ACC’s amicus brief states.
Veta Richardson, ACC’s president and CEO, says the group is taking up the issue because “the attorney-client privilege is sacred to any client’s ability to be completely candid with their attorney.” The ruling, she says, “impacts the ability of attorney and client to engage in confidential, full, and candid communications. It entirely undermines the relationship.”
The controversial ruling arose in a case involving a business transaction between companies that own and operate shopping malls. During negotiations, three defendants from different companies shared certain legal advice that each of them received from their attorneys regarding the purchase.
Plaintiffs argued each defendant waived attorney-client privilege by discussing the legal advice with a third party—i.e., with each other.
The plaintiffs filed a motion seeking all of the attorney-client communications concerning the purchase negotiations, even those not disclosed among the three defendants. The motion included the production of over 1,500 documents identified in defendants’ privilege logs.
When the trial court agreed that the privilege had been waived, the defendants refused to disclose and were held in contempt. On appeal, an intermediate court affirmed the decision [PDF].
Now it’s before the state’s highest court.
ACC’s brief sides with the defendants, arguing that just because a portion of legal advice was discussed with a third party does not mean that the privilege was waived on all legal communications. It says the ruling’s expansion of so-called “subject matter waiver of privilege” is contrary to court policy against creating non-statutory waivers of privilege. The decision also conflicts with the Illinois Rules of Professional Conduct, the brief argues.
Counsel for ACC includes Amar Sarwal, the group’s chief legal strategist; Alexandra Darrow, advocacy chair of ACC’s Chicago chapter and senior corporate counsel of Automatic Data Processing, Inc., in suburban Chicago; and Charles Northrup, general counsel of the Illinois State Bar Association.
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Ted Ullyot
Rob McKenna
Facebook general counsel Ted Ullyot joined Washington State attorney general Rob McKenna in Seattle on Thursday to announce a pair of lawsuits aimed at reducing “clickjacking” scams on the popular social networking site.
Both suits are aimed at Adscend Media, LLC, which, according to the Washington AG’s office, is “an ad network that is alleged to develop and encourage others to spread spam through misleading and deceptive tactics.” Facebook filed its suit against Adscend in federal court in the Northern District of California, and McKenna’s office filed in the U.S. District Court in Seattle.
The suits accuse the Delaware-based Adscend and its co-owners—Jeremy Bash and Fehzan Ali—of orchestrating viral scams that use Facebook’s network and “like” buttons to spread quickly and direct users to sites selling goods and services, often unrelated to the original content shown on Facebook pages. The Consumer Protection High-Tech Unit, based in the Washington AG’s office, estimates that Adscend’s efforts “at one point. . . lined the defendants’ pockets with up to $1.2 million a month.”
According to a statement from McKenna’s office, the scams targeted in the lawsuits work as follows:
Scammers design Facebook Pages to look like they will offer visitors an opportunity to view salacious or provocative content. They condition viewing this content on completing a series of steps that are designed to lure Facebook users into eventually visiting websites that often deceive them into surrendering their personal information or signing up for expensive mobile subscription services.
First, Facebook users are encouraged to click the ‘Like’ button on the scammers’ Facebook Pages, which then alerts their friends to the existence of the page. Then they are told that they cannot access the content unless they complete an online survey or advertising offer. In one example noted in the complaint, the scammers overlay the Facebook ‘Like’ button with a link that promises to reveal the results of: “This man took a picture of his face every day for 8 years!!” Of course, the promised content often does not exist and the tricked user is then directed through a series of prompts taking them off of Facebook and through a host of unrelated advertising and subscription service offers, where the scammers receive money for each misdirected user.
By announcing the two suits in a joint press conference, Facebook and the Washington AG’s office showcased a coordinated, multi-state effort to combat these types of online scams. “We applaud Facebook for devoting significant technical and legal resources to finding and stopping scams as soon as possible—and often before they even start,” said McKenna at the press conference. “We’re proud to join forces in order to protect Washington consumers.”
Facebook GC Ullyot also used strong rhetoric at the event to describe his company’s actions against Adscend, saying, “Security is an arms race, and that’s why Facebook is committed to constantly improving our consumer safeguards while pursuing and supporting civil and criminal consequences for bad actors.”
In addition to Facebook’s litigious anti-scam efforts, the California-based company also provides detailed descriptions of the many security threats facing its social network—along with steps users can take to safeguard themselves against such threats—at facebook.com/security.
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It’s been a big week for data privacy. First Google announced its new privacy policy, which will sync user information across all company products, including search results. Then the European Union announced a proposed overhaul of its data protection law. And next, the Federal Trade Commission and the U.S. Department of Commerce are expected to unveil their own communiqués on U.S. privacy policy. (And in case it’s not already on your calendar, Thursday was also Data Privacy Day!)
What does this sudden explosion in attention to data privacy mean for companies?
“I think the first takeaway is just how consequential and pervasive the issue of privacy, information security, and regulation of data protection are to business, commerce, and international trade,” says Alan Charles Raul, a partner at Sidley Austin in Washington, D.C., and global coordinator of the firm’s privacy, data security, and information law practice.
Part of the wave of new policies is just about keeping up with the forward momentum of the digital age. The E.U. had not revised its data protection policy since 1995. For its part, Google—as the Wall Street Journal noted—is increasingly in competition with Facebook for market leadership in leveraging personal data of users.
Because of the global interconnectedness of many online enterprises, a data-policy change in Europe or at Google’s California headquarters should not be viewed too narrowly. If a company in the U.S. is offering services to individuals in the E.U., for instance, it is likely this new proposal would apply to how they handle their overseas customers’ data, Raul says.
He highlights several key items for businesses in the E.U. plan. First, under the proposal, a company could be fined up to 2 percent of its annual worldwide revenue for committing a violation. That should capture the attention of both compliance officers and boards of directors, Raul says.
The proposed legislation also incorporates the continent’s notion of the “right to be forgotten”—that is, for example, the right of consumers to compel companies and third parties to delete their information from the Internet. (As Constitutional scholar Jeffrey Rosen recently pointed out on these web pages, that idea is quite divergent from the American concept of freedom of expression.)
The E.U. proposal does incorporate some U.S. themes, too, says Raul. It would impose affirmative data security obligations on companies, as well as data breach notification requirements. Though Raul thinks that the 24-hour proposed turnaround time for data breach notification is not entirely feasible or desirable.
However, like existing E.U. privacy law, the proposed directive does not apply to government requests for information in the context of national security.
The E.U. proposal process is analogous to that of a bill that is introduced to the U.S. Congress. It would need to be approved by the full E.U. Parliament and by the European Council of member states. The proposal could be modified during that time, says Raul. And if the proposal is eventually finalized and approved, it would not take effect for two years after passage.
In the meantime, however, the proposal will inevitably serve as a point of reference for two U.S. government proposals that are due “any day now,” says Raul. The Commerce Department is expected to release its framework on data privacy policy, to be followed by the release of a final staff report on privacy from the FTC.
“We’ve got these other two major privacy shoes to drop,” Raul says. “These will be significant items that the privacy community, as well as any business, will have to digest.”
See also: “Privacy, Technology, and Preparing Corporate Lawyers for the Future,” CorpCounsel, December 2011.
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