Global Regulatory Enforcement Law Blog : Global Regulatory Enforcement Lawyers & Attorneys: Reed Smith Law Firm: Government Contracts & Compliance

This post was written by Judith L. Harris, Christopher G. Cwalina and  Amy S. Mushahwar.

The midterm elections will likely result in a shift of political power within the House of Representatives. The resultant divided government is likely to impact the present ambitious privacy and data security legislative agenda. Reed Smith Washington D.C. Data Privacy, Security and Management attorneys Judith Harris, Christopher Cwalina, and Amy Mushahwar have published an analysis of their predictions for 2011 legislative priorities as the incoming crop of legislators move from campaign mode to governance. Please see their article in Information Security here.

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After the roaring success of the first Round-up (remember when I gave it the cool nickname) we are back for round two. Here is a quick jog around the regulated legal world.

• Have you ever known a professor who didn't love golf? I didn't think so. Have you ever been able to get a lawyer to stop talking about the law? Don't lie to me, its rude. It was going to happen sooner or later, but I'm hoping this one sticks around -- ladies and gentlemen, for your tee time banter: The FCPA Mulligan Rule.
• I hope you got all of your "Congress never does anything" jokes out of your system. These Lame Ducks could cost you a fortune.
• 10 years ago the thought of having two employers would have meant that I had: 1) two small paychecks, 2) a couple of lousy jobs, and 3) at least one terrible middle manager to report to. I'd much rather be a federal contractor in this day and age, where having joint employers means there are more people to sue.
• If you sit real still, watch closely, and are willing to have less fun than bird watching, you can witness the birth of the proxy advisor industry.

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This post was written by Leslie A. Peterson.

The government contracts community has long debated what steps, if any, the federal government should take to help women-owned small businesses break through the glass ceiling (or get off the sticky floor). Taking one of the last steps in a process that began in 2000, on October 7, 2010, the Small Business Administration (“SBA”) filed a final rule creating the Women’s Contracting Rule. The final rule establishes a procurement program for women-owned small businesses (“WOSBs”) in 83 industries where they are underrepresented. Under the WOSB Federal Contract Program (“WOSDFCP”), qualified WOSBs will be eligible for set-asides with respect to federal contracts of less than $5 million for manufacturing and less than $3 million for other goods and services.

Launching the overdue womens’ procurement program was a top priority for the Obama Administration.  In March of this year, taking into consideration various market analyses, draft rules, and public comments, SBA “started from scratch” and crafted a completely new rule. The end result is a program designed to achieve the statutory goal of awarding 5 percent of federal contracts to WOSBs.

To qualify for an award under the WOSBFCP, a small business must be 51 percent owned, controlled, and primarily managed by one or more women who are U.S. citizens. Further, WOSBs must self-certify their status or be certified by a qualified third-party.

Although the final rule is not scheduled to take effect until February 4, 2011, SBA and the Federal Acquisition Regulation Council have prepared for its success by implementing the rule in the Federal Acquisition Regulation and other federal procurement rules. Those interested in learning more about the WOSBFCP should visit the SBA’s website, www.sba.gov, for more details on the final rule and guidance on compliance with its provisions.

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This post was written by James A. Rolfes.

The Second Circuit Court of Appeals recently ruled that a corporation could not indemnify its CEO or CFO against liability arising under Sarbanes Oxley Act Section 304. The so-called Section 304 “clawback” provision requires a public company’s CEO and CFO to return bonuses, other equity-based incentive compensation and trading profits when “misconduct” leads to material noncompliance with financial reporting requirements (i.e., a financial statement restatement). This statute further gives the SEC the authority to enforce such clawbacks, and, importantly, to exempt CEOs and CFOs from its application. As a result, allowing a corporation to provide a release and indemnification for the clawback would “frustrate the power of a federal agency to pursue the public’s interests in litigation” and “[fly] in the face of Congress’s efforts to make high ranking corporate officers of public companies directly responsible for their actions that have caused material noncompliance with financial reporting requirements.” Cohen v. Viray.

This decision follows closely upon Congress’s call last summer for the SEC to get serious about the return of executive bonuses when a company restates its financial statements. In particular, in the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress expanded upon the SOX Section 304 compensation clawback provision, explicitly instructing the SEC to establish rules requiring exchange-listed public companies to recover the incentive-based compensation paid to corporate executives as a result of using erroneous financial statement data.

The decision also issues during a period in which the SEC has more aggressively used the SOX 304’s clawback provision in enforcement proceedings. Despite being on the books for over eight years, the SEC sparingly invoked the provision in enforcement actions, and then only when a CEO or CFO had direct involvement in causing a financial statement misstatement. Starting in 2007, however, the SEC more regularly has sought SOX 304 disgorgement, and, as the result of a controversial decision that split the Commissioners along party lines, has demanded the return of pay from CEOs and CFOs that unwittingly – as opposed to intentionally – benefitted from the accounting misconduct. (An interpretation recently endorsed by a federal court in SEC v. Jenkins.)

Many questions remain regarding the interpretation of SOX 304 – questions likely to be repeated as the SEC works its way through the rule making process Congress has demanded under Dodd-Frank Section 954. The issues range from what activity will trigger a disgorgement obligation, to whom the obligation will apply, to what payments or incentives will be covered, to what discretion will remain in the SEC’s enforcement of the executive compensation clawback provisions. See Rolfes, Dodd Frank Leaves Clawback Uncertainty, Compliance Reporter (Aug. 30, 2010). What remains clear, however, is that financial statement errors, even if unintentional, will put the earnings of CEOs and CFOs, as well as those of their C-level colleagues, at risk.

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This post was written by Christopher L. Rissetto and Robert Helland.

In Washington, all attention right now is on the rapidly approaching midterm congressional elections and the efforts by Democrats to retain their majorities in both houses of Congress. However, regardless of whether Democrats lose control of the House of Representatives or Senate, members of Congress are expected to return to Washington on November 15th to address unfinished business in a lame duck session of Congress. And there is a lot of unfinished business: Congress still must complete work on a budget for the fiscal year 2011, which began on October 1st. In addition, Democratic leaders have promised to address expiring tax cuts that were enacted during the Bush Administration as well as ratification of a strategic arms control treaty with Russia. And if this wasn't enough, Senate Majority Leader Reid (D-NV) has also promised votes on legislation that (1) regulates food safety; (2) provides tax rebates for those using natural gas and electric vehicles; and (3) addresses wage discrimination.

But wait, as the commercial goes, there's more. Pressure remains in Congress to pass measures that would address certain segments of the economy. This runs from extending tax breaks benefitting various industries, addressing Medicare reimbursement rates for doctors, and providing a one-time payment of $250 to Social Security recipients. It is not clear how many of all these measures will make it through Congress before it adjourns at the end of the year. Given the level of partisanship that we have seen in recent months and through the campaign, there is not a lot of cooperation in place on many bills. However, we do see final action likely on legislation affecting budget and economic matters, such as a multi-bill "Omnibus" bill that funds government operations for the remainder of Fiscal Year 2011 (as well as individual projects requested by Members of Congress) and a tax bill that provides assistance to individuals and businesses. More importantly, we see the lame duck as a place where Congress will "set the table" for the efforts it will take in 2011. The Public Policy & Infrastructure Group remains available to advise clients how to develop a legislative strategy for the lame duck as well as the 112th Congress that will begin in January.

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This post was written by Cynthia O’Donoghue and Nick Tyler.

Having hosted and won the very first ‘soccer’ World Cup in 1930, and then having won it again twenty years later, Uruguay belongs to a very exclusive band of multiple-World Cup winning countries. Having reached the semi-finals of this year’s tournament (for the fifth time in total), this relatively small South American republic has a proud and enviable record as one of the most successful footballing nations.

This year is fast proving to be significant for Uruguay for more serious reasons than national sporting prowess (more serious that is if you do not subscribe to the philosophy of Liverpool FC’s legendary manager, Bill Shankly: “Some people think football is a matter of life and death. I assure you, it's much more serious than that.”)

On 12 October the Article 29 Working Party of European data protection regulators issued an opinion approving Uruguay’s admission into another exclusive club—the list of countries that provide an ‘adequate level of protection’ within the meaning of Article 25(6) of European Data Protection Directive 95/46/EC.  The Article 29 Working Party’s opinion was issued after a two-year review process and is a pre-requisite to approval by the European Commission. Barring any unforeseen political hitches, as befell Israel’s bid for ‘adequacy’ earlier this year, such approval should follow.

Some background points to note about Uruguay’s data protection regime:

• The relevant legislation consists of:
  • Law No. 18.331 of 11 August 2008, on the Protection of Personal Data and “Habeas Data” Action (abbreviated as LPDP in Spanish); and
  • Regulating Decree of 31 August 2009, developing LPDP (DPDP).
• LPDP is comprehensive in its scope and reach, covering all sectors of activity.
• The independent supervisory authority is called the Unit for Regulation and Control of Personal Data (URCDP in Spanish).
• Together with the Unit for Access to Public Information (UAIP) URCDP forms the Agency for the Development of Electronic Government and the Knowledge-Based Society (AGESIC in Spanish).
• URCDP operates a permanent register of databases.
• URCDP has power to impose sanctions ranging from a warning and a fine to suspension of any database.
• Article 8 of DPDP contains data breach notification requirements.
• Article 15 of LPDP provides a right of correction to “every natural or legal person”.
• In the case of any denial of the rights of subject access and correction, Article 38 of LPDP provides for an action or writ of habeas data, also exercisable on behalf of deceased persons.

The concept of Habeas data does feature in a number of other Latin American countries’ constitutions but, unlike those of Argentina and, imminently, Uruguay, these have not achieved the vaunted status of EU-approved ‘adequate’ data protection regimes.

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This post was written by Michael A. Grant.

Hello good-looking regulatory attorneys. Welcome to the first installment of the Regulatory Round-up (catchy, I know). If you are reading this post, odds are someone in an office larger than yours is wondering why you aren't working -- but I'm glad you stopped by. The goal of this weekly installment will be to connect you to stories from around the blogosphere that impact those of us practicing in regulated industries. While the primary focus of the Round-up (look, I already gave it a trendy nickname) will be the 7 topics to the left, I'll be sure to mix in other stories that catch the eye. Here's hoping you see something new, have a laugh, or at least get some legitimate "professional reading" time.

• State and local agencies, you remember Davis-Bacon right? You met at that government contracting convention in Hawaii? You remember … the tiki torches, the pig roast, the Pacific breeze, and non sequiturs about the FAR … but I digress. Looks like you might want to spend some time getting reacquainted; after all, federally funded construction projects must comply with the prevailing wage requirements.
• Tax the bad or fund the good? Ezra Klein discusses differing approaches to combating climate change.
• Who’s left to review the competitive effects of this merger? (or) Why its better to regulate than be regulated. The Competition Law Blog breaks down the proposed merger of the Office of Fair Trading and the Competition Commission.
• You know that feeling you get when you think your banker is stealing from you? You may be on to something.
• I always liked the expression “a license to print money.” Securency International is in the businesses of printing other peoples money, so why are their businesses and homes being raided?

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This post was written by Cynthia O’Donoghue and Nick Tyler.

The Information Commissioner’s Office (ICO), the UK data protection regulator, has recently responded to the UK Government’s Call for Evidence on the current data protection legislative framework. The Ministry of Justice sought evidence about how the European Data Protection Directive 95/46/EC and the Data Protection Act 1998 are working, and their impact on individuals and organisations. The Call for Evidence, which closed on 6 October, seeks to inform the UK negotiation position for a new EU data protection instrument, expected to start in early 2011.

In its response, the ICO asserts that the data protection principles are “sound and should be maintained”, although it acknowledges that changes are needed. The ICO listed key ‘must-haves’ for “an effective new data protection framework”:

• A “much clearer” definition of personal data “more relevant to modern technologies and…practical realities” capable of recognising the many different levels of “identifiability”, and in turn protection, which technology can provide; 
• A “more flexible and contextual” concept of sensitive personal data, with financial and geo-location data being examples of non-sensitive data that warrant increased vigilance and protection;
• A revisit of the definitions of processor and controller and a more collective form of responsibility that deals “more realistically with the collaborative nature of modern business and service delivery”;
• A consistent approach to transparency and consent in Europe as the two concepts are not interchangeable, in meaning or legal effect.
• A new requirement of accountability (see also our recent Client Alert) to “reinforce the responsibility of data controllers”, which can be scaled to an organisation’s size and the risks of their processing of personal data. 
• Significant changes to international data transfers to “deal more realistically with current and future international data flows” by focusing on the exporting data controller’s risk assessment and responsibilities, regardless of location, as well as on assessing ‘adequacy’ based on the specific circumstances and method of transfer as opposed to whether or not a country is designated as ‘adequate’.
• An explicit privacy by design requirement that ensures the building-in of data protection compliance measures at each stage of the information lifecycle as opposed to bolting-on remedial measures.

The ICO’s response is typically pragmatic and builds on several earlier contributions made over the last 18 months. Read together they provide a consistent and compelling case for change (see also, for example, “Making European data protection law fit for the 21st century”).
 

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• TRICARE Final Rule for the inclusion of the TRICARE Retail Pharmacy Program in the Federal Procurement of Pharmaceuticals
• Integrating TRRx utilization in the FCP calculation
   

DATE: Thursday, October 21st, 2010
TIME: 2:00 - 3:15 PM EDT
REGISTRATION: https://www1.gotomeeting.com/register/292046224

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This post was written by Andrew C. Bernasconi and Nathan R. Fennessy.

After Congress and the courts have spent the past few years making it easier for private citizens acting in the name of the government (also known as "qui tam relators") and the government to maintain False Claims Act ("FCA") cases, and eliminating many of the defenses for FCA defendants to dismiss frivolous claims, a recent appellate decision provides a level of comfort to parties defending against allegations of FCA violations that are initiated by qui tam relators. The decision from a three-judge panel of the United States Court of Appeals for the Sixth Circuit, in the matter of United States ex rel. Summers v. LHC Group, No. 09-5883 (October 4, 2010), provides additional support for defendants seeking dismissal of FCA allegations where qui tam relators fail to comply with the FCA's statutory requirements (which include filing the initial qui tam complaint in camera and under seal, see 31 U.S.C. § 3730(b)(2)).

The Sixth Circuit panel held that violations of the FCA’s unique procedural requirements can preclude relators from maintaining actions on behalf of the government. Specifically, the Sixth Circuit panel affirmed dismissal of a relator’s FCA allegations because the relator failed to file the complaint in camera and under seal, as required by the FCA. While several courts across the country (including the U.S. Court of Appeals for the Ninth Circuit) previously have limited the opportunities for defendants to obtain dismissal in such circumstances, the Sixth Circuit expressly declined to follow the clumsy balancing tests employed by these courts. Instead, the Sixth Circuit concluded that the statutory procedures governing qui tam complaints are clear, and that Congress did not intend to allow exceptions to the procedures except as expressly set forth in the statute.

This decision provides strong support for FCA defendants to seek dismissal of qui tam complaints where the relator failed to follow the statutory requirements of filing the initial complaint under seal, or otherwise disclosed the complaint’s allegations while the matter remained under seal and subject to the government's investigation. Although the government can still pursue FCA allegations against a defendant in its own right, the Summers decision serves as a strong basis for defendants to support dismissal where the relator has ignored the statute's plain requirements, and where the government declines to pursue the case.  

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This post was written by Lorraine M. Campos and Joelle E.K. Laszlo.

Federal grant awardees are about to join contractors in the transparent government revolution. Beginning in November, awardees of prime grants valued at $25,000 or more may be required to report certain executive compensation information about themselves and their subgrantees. The new reporting requirements, established under the Federal Funding Accountability and Transparency Act (“FFATA”), were greeted with open hostility at a recent Office of Management and Budget (“OMB”) Town Hall meeting. Not enough hostility to prevent them from taking effect, however, so prospective grant recipients should take note.

The new grantee reporting requirements are similar to those placed on contractors by the FFATA, about which we reported in August. Unlike the contractor reporting requirements, however, the grantee requirements will not be “phased in” over time. Rather, any new grant of $25,000 or more awarded as of October 1, 2010 will require reporting two types of information. First, the name and total compensation of each of the prime grantee’s five top executives must be reported if the prime grantee (A) receives more than 80 percent of its annual gross revenues from the federal government, which revenues exceed $25 million annually, and (B) does not already report its executive compensation through the Securities and Exchange Commission. Second, without exception, a prime grantee must report specific data about all first-tier subgrants it awards that are valued at $25,000 or more. That data includes the name of the subgrantee and the amount and purpose of the award, the subgrantee’s location and the place of grant performance (including the congressional district), and the award’s Catalog of Federal Domestic Assistance program number and program source. Additionally, if a first-tier subgrantee meets the conditions for reporting executive compensation of grantees (items (A) and (B) above), the grantee must report the name and total compensation of each of the subgrantee’s five top executives.
Possibly in an effort to take some of the sting out of the reporting requirement, OMB officials presenting at the Town Hall stressed that grant reporting under the FFATA only needs to happen once – there is no continuing reporting requirement. A prime grantee will have until the end of the month following the month of obligation of a grant or first-tier subgrant subject to the reporting requirements, to report related executive compensation and/or subgrant information. Thus, for example, reporting related to a grant awarded October 1, 2010 and subject to the FFATA requirements must be completed by November 30, 2010.

As with contractor reporting under the FFATA, grantee reporting will take place though the FFATA Subaward Reporting System (“FSRS”), at www.fsrs.gov. While FSRS is currently open for contractor reporting, the site’s grant reporting functionality will not be available until October 29. FSRS has been programmed to receive data through the Central Contractor Registration database, www.ccr.gov, in which all prime contractors and grantees (but not subcontractors or subawardees) are required to register.

On October 7, OMB held the first of two planned webinars for grantees on how to use FSRS. Those wishing to receive updates on training and other developments related to FFATA reporting are encouraged to register at USASpending.gov. Those wishing the reporting requirements will go away are advised to keep wishing (and learn how to use FSRS in the meantime).  

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This post was written by Leslie A. Peterson.

The Small Business Jobs Act of 2010 (“the Act”), signed by President Obama on September 27, 2010, quashed the argument that Historically Underutilized Business Zone (“HUBZone”) small businesses are entitled to absolute contracting priority. Section 1347 of the Act establishes parity among the Small Business Administration’s (“SBA”) various small business contracting programs. Passage of the Act eliminates the requirement that contracting officers must first check for eligible HUBZone companies to perform work before looking to other types of small businesses.

Contracting officer discretion to treat the SBA’s programs equally when awarding set-asides had been heavily debated after recent decisions from the Government Accountability Office and the U.S. Court of Federal Claims established a preference for HUBZone small businesses. In Mission Critical Solutions v. U.S., the Court of Federal Claims held that the Small Business Act requires contract opportunities to be set aside for HUBZone firms whenever two HUBZone firms are available to perform the contract. The court based its decision on the use of the word “shall” to describe contracting officer requirements with regard to awarding HUBZone set-asides. Under the court’s interpretation of the language, HUBZone small businesses were to get first preference over other categories of small business programs, such as minority-owned businesses and veteran-owned businesses.

The new Act eliminates preferential treatment for the HUBZone program by changing the language of the Small Business Act from "shall" to "may," to mirror the language used to describe contracting officer requirements with regard to other SBA programs. As a result, contracting officers are no longer required to give preference to HUBZone firms and are able choose which small business contracting program to utilize when making set-asides.

The attorneys at Reed Smith will continue to monitor any developments associated with the Small Business Jobs Act of 2010.
 

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This post was written by Christopher L. Rissetto, Lorraine M. Campos and Robert Helland.

The Public Policy and Infrastructure Practice continues to monitor the changes in the campaign finance world since the Supreme Court's landmark decision in Citizens United v. Federal Election Commission. Citizens United reverses decades of statutory and case law that prohibit corporations from using their general treasuries to fund independent political advertising supporting or opposing candidates for local, state or federal office, or what it is termed "express advocacy". 558 U.S. 50 (2010). It also removes restrictions on independent advertising released within close proximity to either a primary or general election and which refer to a clearly identified candidate for federal office (known as “electioneering”). This decision has been the equivalent of an earthquake in the campaign finance world, however, it does not provide corporations and labor unions with unlimited leeway when it comes to funding political advertisements. The attached alert from the Public Policy and Infrastructure Practice discusses one limitation that remains in place, post-Citizens United, which affects "coordinated communications" i.e. those coordinated with a federal candidate, campaign, or political party. Contributions that are coordinated with a federal candidate, campaign or political party are considered a direct, in-kind contribution and remain illegal in the case of corporations or labor unions, even with the Court's decision in Citizens United. 2 U.S.C. § 441b (a).

The Federal Election Commission has issued revised regulations as to what constitutes a "coordinated communication". These rules will take effect on December 1, 2010. The alert discusses these rules and what steps can be taken to ensure that a communication is truly independent.
 

To view the entire alert click here.

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This post is written by James P. Gallatin, Jr. and Lorraine M. Campos

Being a Contracting Officer may be the most thankless job in government. Let’s just say it, it IS the most thankless job, period.

Unfortunately, the government acquisition personnel are often overworked and understaffed. Earlier this year, Peter Orzag, the former OMB Director, stated that while there is more than $500 billion in federal contracts, and while those contracts have doubled in size over the past eight to nine years, the acquisition workforce has generally remained constant. So there is an ever-increasing workload; responsibility for billions of dollars in purchases from sophisticated and highly aggressive commercial vendors across a staggering variety of industries; compensation far below private sector peers; constant scrutiny by their agency personnel, auditors, and Inspectors General; regular second-guessing or simple overruling by senior management; mocking by congressional representatives and senators as incompetent – what’s not to like?

But wait . . . there’s more. The thanklessness of being a Contracting Officer is further highlighted by the erosion of independence definitively described in "The Incredible Shrinking Contracting Officer" by John S. Pachter in the Public Contract Law Journal, Vo. 39, No. 4 Summer 2010. Every government acquisition professional should read this piece – and be prepared to be depressed. (It’s not pretty reading for the contractor community either.) And we haven’t even talked about the emerging and disturbing trend toward OIG investigations of Contracting Officers when an auditor cannot locate the acquisition file, even though the contract file may be a decade old and may have been transferred to other procurement personnel.

We are not addressing the “nonprofessionals” we have encountered who have never read the $400 million contract they administered for 10 years; nor are we talking to those who have made no attempt to understand what they are signing, leaving the rest of us to clean up the resulting messes years in the future. They are a lost cause. We are talking about the “professionals” – people intent on doing a professional job, with all the authority, few of the proper tools, and a whole lot of negative reinforcement. No wonder so many talented professionals forthrightly head to private industry at the first opportunity.

But the simple fact is that those of us in the private sector who work with Contracting Officers share the challenges they face. It does us no good to abuse the pressure or lack of resources to strike a tough deal or ram through a poorly crafted contract. Both sides will address the consequences at some point in the future, and the government has unlimited money, time, and lawyers. This challenge has only one professional and productive response, a response that furthers private industry and the taxpayers’ interests: Support Contracting Offices and their fellow acquisition professionals in their work.

It isn’t rocket science, people. It’s the basics. Make sure your Contracting Officer understands what you are selling and how you sell it. Don’t hide the ball. When in doubt disclose – disclose in writing. Document everything and keep the documents for at least the term of the audit-rights under the contract. Make sure the contract is clearly written, reflects the business deal, makes sense in your industry, and includes all the relevant documents. Read what you sign before you sign it. Read it again. Explain it to someone else. Then sign it. And save a copy of the awarded contract and all pertinent correspondence.

Where and when ethically permitted, get to know your key acquisition professionals. Understand their workloads and priorities. Understand the outside pressures they have to deal with, whether meddling management, hyper-aggressive auditors, or the wonderful benefits of congressional oversight. Make sure they understand not only your workload and priorities, but also your industry and issues. Go to their industry days and make sure they have other ethically appropriate but effective means to how your business sector works.

Contracting Officers’ roles will likely remain a frustrating mix of critical importance, limited support, and lots of intervention by third parties. Private industry has no choice but to do a better job on its end of supporting Contracting Officers in creating reasonable, defensible contracts. So yes, we end with this plea – Support your Contracting Officer.

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This post was written by Edward Miller, Marjorie Holmes and Susan Riitala.

On 14 September 2010, the European Court of Justice (ECJ) dismissed an appeal by Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd made against a decision of the General Court not to allow e-mails exchanged between a client and an in-house lawyer to be covered by legal professional privilege. The ECJ held that legal professional privilege may not be invoked by undertakings in relation to communications with in-house counsel when it comes to competition investigations by the European Commission. The decision affirmed the two-part test laid out in AM&S Europe v Commission in 1982, whereby legal advice can only be privileged (1) where it is connected to ’the client’s rights of defence’ and (2) where it emanates from ’independent lawyers’, that is to say ’lawyers who are not bound to the client by a relationship of employment’.

In the court's opinion, economic dependence and close contractual and commercial ties with their employer mean that in-house lawyers do not have comparable independence to that of external advisers. This is irrespective of any obligation of the in-house lawyer to comply with professional rules or standards of independence. The court held that the legal system in Europe and the regulation of anti-competitive practices has not evolved sufficiently to require a change in the law on privilege. This was particularly in light of the lack of consensus between Member States on whether privilege extends to in-house advisers. The ECJ further found that the judgment of the General Court (the first instance court) did not breach the principles of equal treatment, legal certainty, national autonomy and conferred powers and the appeal was dismissed on all grounds. The judgment was made notwithstanding several detailed submissions on behalf of in-house lawyers in the EU.

In-house lawyers are often closely involved with competition compliance, and the judgment makes it more difficult for undertakings to rely on them in respect of competition issues. There is a particular difficulty as many Member States, including the UK, extend legal professional privilege to communications involving lawyers directly employed by their client. It should be noted that where a case is investigated in the UK by the Office of Fair Trading (OFT) on its own behalf, the OFT's powers of investigation provide that UK privilege rules apply to communications involving in-house lawyers. However, where the OFT receives communications of in-house lawyers or of lawyers qualified outside the EU from a national competition authority in another Member State and those communications are not privileged under the laws of the other Member State, the OFT may use such communications in its investigation in the UK. Similarly, if the OFT is assisting the EU in an investigation, the EU privilege rules will apply. The ECJ did not address the issue of in-house legal advisers in jurisdictions outside the EU. The position therefore remains that communications with non-EU qualified lawyers will not benefit from privilege in EU competition investigations. This has important implications for US undertakings and for undertakings in the EU facing simultaneous investigations in the US and the EU and caution should be exercised in this regard.

Even though this outcome is not unexpected, given that it follows Advocate General Kokott's opinion given to the ECJ in April, it may be disappointing. The ECJ has not recognised either that there has been any increase of importance of in-house lawyers or their close involvement in competition compliance. As a result, caution must be exercised in written communications within an undertaking when discussing matters that could be relevant to an EU competition investigation.

The full text of the judgment is available here.

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