ADR News from Jim Reiman
Friends & Colleagues –
For those who are new to this newsletter, each month I compile a collection of one or two articles, court decisions or news items that Ive come across that I hope readers will find of interest concerning the subjects that occupy my time and thoughts. I focus on three principal topics: i) corporate governance; ii) legal and business issues concerning alternative dispute resolution, primarily mediation and arbitration, and iii) e-Documents, or more specifically, corporate governance policies regarding their management and security, and litigation issues regarding their discovery. I also look for and try to include a case or matter of general interest which is either amusing or thought provoking my Interesting Case of the Month.
This months corporate governance articles include the CalSTRS Best Practices in Board Composition Guide and Corporate Governance Principles (for those who dont know CalSTRS, its The California State Teachers Retirement System, which manages a portfolio valued at over $190 billion). Also included is a discussion of the new proposed SEC Pay for Performance Rule. For our ADR practitioner readers, I present an article describing the energetic argument in the Third Circuit concerning the question of who decides the arbitrability of class actions, and a description of this summers Chinese Supreme Peoples Courts resolution of the CIETAC jurisdictional issues. Regarding eDocuments, I go a bit off-course this month and present a case which is not, strictly speaking, an eDocuments or e-Discovery case. Rather, it is a decision that holds that the Federal Trade Commission has the power to regulate corporate cybersecurity and to bring administrative actions against companies for cybersecurity deficiencies. Finally, this months issue includes an Interesting Case of the Month, which this month discusses college pay of athletes.
More specifically, this months articles and cases are:
- Board Governance Principles and Board Composition Best Practices: CalSTRS, the California State Teachers Retirement System with a portfolio valued at over $190 billion and one of the financial industrys thought leaders in corporate governance, issued a list of best practices for board composition and a statement of the principles they employ in their proxy voting activities. Of note is their position on director time commitment.
- SECs Proposed Pay-for-Performance Rules: The SEC finally published its proposed rules regarding the required disclose of the relationship between executive compensation and the companys financial performance. Under the proposed rules, companies must disclose the relationship between executive compensation actually paid and company total shareholder return (TSR), and company TSR and peer group TSR.
Alternative Dispute Resolution
- Arbitration of Class Actions: Who decides the arbitrability of a class action? A judge, or an arbitrator? This was the question presented to the U.S. Court of Appeals for the Third Circuit in two cases argued earlier this month before the Court.
- Chinese Arbitration Jurisdictional Issues: The Chinese Supreme Peoples Court, in July, issued a judicial interpretation resolving the jurisdictional questions raised by the separation of the Shanghai and Shenzhen Sub-Commissions of CIETAC.
- A US Court of Appeals for the Third Circuit decision which holds that the Federal Trade Commission has the power to regulate corporate cybersecurity and to bring administrative actions against companies for cybersecurity deficiencies.
Interesting Case of the Month The O’Bannon Case
The Ninth Circuit Court of Appeals decision regarding the rights of student-athletes to be paid for the use of their images and likenesses in video games and other media, and rulings regarding the NCAAs antitrust status and scholarship cap rules.
I hope you find the below discussion and linked articles of interest..
Warm regards –
Articles / Corporate Governance
CalSTRS Board Composition Principles
CalSTRS, the California State Teachers Retirement System, is one of the worlds largest pension plan administrators and also one of the nations thought leaders in the world of corporate governance. Managing a portfolio valued in excess of $190 billion CalSTRS, while not an activist investor, is not shy about their assessments of their portfolio companies governance practices nor voting their shares when not pleased. As Anne Sheehan, CalSTRS Corporate Governance Director, put it: At CalSTRS, we invest across the entire market and do so for the long term. The proper structure and governance of a board is key to the successful performance of a company. Of note, CalSTRS not only sees good corporate governance practices as a way to add value but also to mitigate risk in the portfolio
To better inform companies of their assessment and voting practices, CalSTRS prepared and issued in April their Corporate Governance Principles, which is a short and concise statement of the framework employed by CalSTRS for their proxy voting activities. In May, CalSTRS put out a 2 page statement of, as they titled the document, Best Practices in Board Composition. While a read of both documents is worthy of every directors time (especially given their brevity and simple, clear statements of policy), I highlight here one of their best practice principles –
Director Time Commitment: The responsibilities of being a public company director are increasingly complex, demanding and time-consuming. CalSTRS believes that CEOs should not serve on more than one other public board, and that directors should not serve on more than four public boards.
The Securities Exchange Commission, as required by the Dodd-Frank Act, finally published this past April its proposed rules regarding the required disclose of the relationship between executive compensation and the companys financial performance. If the rules are finalized in 2015, calendar year companies may be required to make the disclosures in their 2016 proxies. Smart money, however, predicts that finalization will not occur until 2016, and many hope that a Republican president and Republican Congress will remove the legislatively mandated disclosure.
Until that happens, directors and corporate lawyers need to be familiar with the proposed rule and be prepared to implement it for their companies. Several excellent articles, summaries and guides regarding the proposed rules have been published. Personally, I like the one by Edmond T. FitzGerald published in the Harvard Law School Forum on Corporate Governance and Financial Regulation. As he summarizes the proposed rule,
[A] company must provide in their proxy or information statement:
A new table, covering up to five years, that shows:
- compensation actually paid to the CEO, and total compensation paid to the CEO as reported in the Summary Compensation Table;
- average compensation actually paid to other named executive officers, and average compensation paid to such officers as reported in the Summary Compensation Table; and
- cumulative total shareholder return (TSR) of the company and its peer group;
Disclosure of the relationship between:
- executive compensation actually paid and company TSR; and
- company TSR and peer group TSR.
Articles / Alternative Dispute Resolution
Early this month the U.S. Court of Appeals for the Third Circuit heard oral arguments in two cases addressing the question: who decides the appropriateness of class arbitration, an arbitrator or a judge? Noting that two District Courts have split on the question, the Third Circuit took up the issue in two cases: Scout Petroleum v. Chesapeake Appalachia and Burkett v. Chesapeake Appalachia. Gina Passarella, writing for The Legal Intelligencer, covered the arguments and wrote an excellent article describing the energetic questioning and counsels responses. For example:
Judge Cheryl Ann Krause asked whether a decision by the parties to enter into bilateral arbitration equated to an agreement to arbitrate class claims. Pratter [counsel for Scott Pretroleum] said the contract at issue says “all disputes” and the AAA rules were incorporated by reference as part of the agreement.
“How could that be correct, possibly?” Cowen asked Pratter, noting the court doesn’t look at the AAA rules to see if all parties agreed to class arbitration but, rather, would look to the agreement itself.
The article is a worthy read not just for its description of the argument of the question at issue, but also the Courts analysis of arbitration agreements generally and the impact of adopting an arbitration organizations rules.
For those who have been following the confusion resulting from the separation of the Shanghai and South China Sub-Commissions of China International Economic and Trade Arbitration Commission (CIETAC) from CIETAC, the Supreme Peoples Court (SPC) of China has given guidance.
Background: CIETAC, headquartered in Beijing, had a sub-commission in Shanghai and Shenzen. In 2012, these sub-commissions declared their independence from CIETAC in Beijing and subsequently changed their names, the Shenzen sub-commission to the South China International Economic and Trade Arbitration Commission/Shenzhen Court of International Arbitration (SCIA), and the Shanghai sub-commission to the Shanghai International Economic and Trade Arbitration Commission/Shanghai International Arbitration Center (SHIAC).
As described in a Morrison Foerster Client Alert
Following the split, CIETAC sought to assert jurisdiction over disputes arising from or in connection with contracts providing for arbitration administered by its former Sub-Commissions. For instance, on August 1, 2012, CIETAC announced that where parties had agreed to administration of their disputes by its former Sub-Commissions, they were required to submit their requests for arbitration to CIETAC in Beijing. Ultimately, CIETAC announced a restructuring of its Sub-Commissions, establishing new Sub-Commissions in both Shanghai and South China/Shenzhen, on December 31, 2014. The restructured Sub-Commissions are called CIETAC Shanghai Sub-Commission and CIETAC South China Sub-Commission respectively.
The split and the subsequent renaming of the former CIETAC South China and Shanghai Sub-Commissions resulted in considerable uncertainty and dispute as to the validity of arbitration agreements specifying, and the enforceability of the arbitral awards rendered by the breakaway Sub-Commissions, SCIA and SHIAC. This caused concern among users. This concern was heightened when, in 2013, the Intermediate Peoples Court of Suzhou denied recognition and enforcement on jurisdictional ground of an arbitral award rendered by the SHIAC
In July, the SPC resolved the uncertainty. A clear and concise English language description of the ruling and how it is to be applied may be found in an excellent Morrison Foerster Client Alert
Articles / e-Documents
Even though this months case, Federal Trade Commission v. Wyndham Worldwide Corp, is not precisely a case concerning e-Documents, I thought readers would appreciate knowing about it because it addressed and resolved the question: can the FTC use its power to enforce unfair trade practices to challenge deficient corporate cybersecurity. The US Court of Appeals for the Third Circuit found that it may, affirming a District Court decision holding that the FTC has authority to regulate cybersecurity under the unfairness prong of the Federal Trade Act.
Wyndham is a hospitality company that franchises and manages hotels. The FTC alleged in its suit that, at least since April 2008, Wyndham engaged in unfair cybersecurity practices that, taken together, unreasonably and unnecessarily exposed consumers personal data to unauthorized access and theft. Specifically, the FTC alleged that Wyndham did not use encryption, firewalls, and other commercially reasonable methods for protecting consumer data. On three occasions in 2008 and 2009 hackers breached Wyndhams network and obtained consumer data leading to over $10.6 million dollars in fraudulent charges.
The Court found that under the broad authority granted to the FTC to protect consumers from unfair and deceptive trade practices, the FTCs action against Wyndham was proper.
Articles / Interesting Case of the Month
This months Interesting Case concerns the NCAAs definition of amateur status of student athletes and the rights of student athletes to receive monetary payments for the use of their images and likenesses. The case arose as a challenge to the NCAAs rules imposing caps on scholarships and prohibiting student athletes from receiving compensation for revenues generated from the use of their names, images and likenesses in video games and other media.
The case, OBannon v NCAA Electronic Arts, was tried in the Northern District of California after which the trial court judge made three significant findings: i) that the NCAA was subject to the countrys antitrust laws, ii) the NCAAs rules imposing scholarship caps was unlawful, and iii) the NCAA must allow member schools to pay deferred compensation to certain student-athletes of up to $5,000 per year of eligibility to compensate them for revenues generated from the use of their names, images and likenesses.
The Ninth Circuit Court of Appeals upheld the trial courts findings that the antitrust laws applied to the NCAA and that its rules imposing scholarship caps were illegal. However, as related by Paul Avery and Phillip Zaccheo in an article in Higher Education Law, the Court of Appeals disagreed with the [trial court] regarding the payment of compensation to student-athletes for the use of their names, images and likenesses. According to the Court of Appeals, when the [trial court] found that paying student-athletes would promote amateurism as effectively as not paying them, the [trial court] ignored that not paying student-athletes is precisely what makes them amateurs. (Emphasis in original). The Court of Appeals continued:
“The difference between offering student-athletes education-related compensation and offering them cash sums untethered to educational expenses is not minor; it is a quantum leap. Once that line is crossed, we see no basis for returning to a rule of amateurism and no defined stopping point.