So what can you do avoid this problem? One solution is to have each subcontractor or supplier sign what is called a “waiver of lien rights” before they do any work on your home. You can also include a requirement that subcontractors sign a waiver of lien rights as part of your contract with the prime or general contractor.

Don’t be stuck holding the bag for your general contractor. Get those waiver of lien rights signed.

Reading cases has never been the primary way I learn the law. There are more effective and efficient ways to learn new practice areas or to keep up with developments in fields that I already know well. Between continuing legal education seminars, professional journals, and legal blogs, it is easier and easier for an attorney to stay up-to-date on the law without ever reading a case. But I still can’t break the habit. I read cases every day just for the purpose of staying informed.

This morning, I found myself reading Colon v. State, a Connecticut Appellate Court decision released online two days ago, but not technically “officially released” until next Tuesday. I guess the courts can’t acknowledge the internet or that you don’t need a hard copy of a case to read it anymore. As they sang in Fiddler on the Roof, “Traditioooooooon! Tradition! Tradition!”

There’s some irony in making that connection with Colon. The case is about not letting trivial technicalities stop a case from proceeding. The plaintiff forgot to include an amount in dispute or to include that amount on a separate page. The plaintiff’s lawyer ignored or forgot the rules and the trial court dismissed the case for that error. But the law was changed in 1976 to say that this was no longer a jurisdictional requirement. In many ways, this case is the anti-Iqbal, a U.S. Supreme Court I wrote about in the Connecticut Law Tribune in 2009. Unlike in federal court, nobody is writing any obituaries for notice pleading in Connecticut state court. That’s a good thing.

Now if we only get our state courts to be as progressive with their publications rules…

By Mark Dumas

Title VII of the federal Civil Rights Act prohibits companies from retaliating against employees who file discrimination charges, but does the act protect a complainant’s friends and family from retaliation as well?

Last week, the U.S. Supreme Court addressed this issue in a unanimous decision that plaintiffs’ lawyers are hailing as a landmark victory for whistleblowers. Employers, in contrast, are now left wondering whether previously unprotected employees will now be shielded from adverse employment actions because of a co-worker’s unrelated discrimination complaint.

Office Romance

The story of Thompson v. North American Stainless begins, like many employment law cases, with an office romance. Eric Thompson was a metallurgical engineer at North American Stainless where he met his future fiancée, Miriam Regalado, a quality-control engineer. In February 2003, the couple was engaged when management learned that Regalado had filed a sex discrimination complaint against the company with the Equal Employment Opportunity Commission (EEOC). Three weeks after the company was notified of the charges, Thompson was fired.

Because of the suspicious timing of his termination, Thompson filed a complaint with the EEOC claiming that North American Stainless violated Title VII’s anti-retaliation provisions by discharging him in retaliation for his fiancée’s complaint. When the case reached the district court, the company was granted summary judgment on the grounds that Title VII does not permit third-party retaliation claims. The 6th Circuit then affirmed that decision, holding that Thompson did not personally engage in any protected activity and therefore was not included in the class of persons for whom Congress created a cause of action for retaliation.

Zone Of Interest

In reversing the lower courts, the Supreme Court addressed two issues; first, whether terminating Thompson in retaliation for his fiancée’s EEOC complaint was unlawful under Title VII; and second, whether Thompson had standing to pursue a claim of retaliation in addition to any claim of retaliation by Regalado herself.

The Court held with “little difficulty” that Thompson’s termination would violate Title VII if the allegations of his complaint were proven true. Writing for the Court, Justice Antonin Scalia stated that while the anti-discrimination provisions of Title VII are limited to discriminatory actions that affect the terms and conditions of employment, the anti-retaliation provisions prohibit employers from taking any action that might dissuade “a reasonable worker from making or supporting a charge of discrimination.”

Accordingly, the Court held that any reasonable worker would be dissuaded from filing a charge of discrimination if she believed her fiancé could be terminated because of her complaint.

The Court next addressed whether Thompson had standing to sue as a “person aggrieved” under Title VII. In doing so, the Court relied on the “zone of interest” test applied to similar language in the Administrative Procedure Act. Citing Lujan v. National Wildlife Federation,497 U. S. 871, 883 (1990), the Court held that under this standard, “a plaintiff may not sue unless he ‘falls within the “zone of interests” sought to be protected by the statutory provision whose violation forms the legal basis for his complaint.’” Stated differently, a third-party retaliation claim under Title VII must be denied “if the plaintiff’s interests are so marginally related to or inconsistent with the purposes implicit in the statute that it cannot reasonably be assumed that Congress intended to permit the suit.”

The Court recognized this test could result in retaliation suits any time a company fires an employee who is somehow associated with a co-worker who files a discrimination complaint, but the Court argued that this concern did not justify “a categorical rule that third-party reprisals do not violate Title VII.” And in a passage that will be cited against employers in hundreds of briefs, the Court stated that, “We think there is no textual basis for making an exception to it for third-party reprisals, and a preference for clear rules cannot justify departing from statutory text.”

So what does that mean for both plaintiffs and employers? Mostly it means that the lower courts are left to sort out which third-party employee relationships are in the “zone of interest” for the purpose of Title VII retaliation cases. Unfortunately, the Supreme Court provided almost no guidance except that firing a close family member will almost always meet the standard and minor actions against mere acquaintances will almost never meet it.

Will such claims apply to girlfriends and boyfriends? Best friends? A father’s brother’s nephew’s cousin’s former roommate? Your guess is as good as Justice Scalia’s.

Lessons for Employers

Despite this uncertainty, employers can learn several important lessons from Thompson v. North American Stainless. First, until further guidance is provided by the courts, employers should pay careful attention to the close relationships between employees who file discrimination complaints and their co-workers.

Second, always be mindful of the timing of adverse employment actions. Temporal proximity of events may give rise to an inference of retaliation for the purposes of establishing a prima facie case of retaliation under Title VII. If the employer in Thompson simply had better timing, you probably would not be reading this article.

Finally, be wary of retaliation claims. While discrimination charges are the most obvious concern for many employers, the risk of retaliation cases is growing and such claims are frequently more difficult to defend. This trend is shown by a recent EEOC report that stated that in 2010 the number of retaliation claims filed with the agency surpassed the number of racial discrimination complaints for the first time. If you respond to a discrimination complaint properly, you can avoid adding to that trend in 2011.

By Mark Dumas

Bonus season is months away, but don’t tell that to Joseph Wall, a former executive at a consulting company in West Hartford. Five years ago, his former employer refused to pay roughly $120,000 in bonuses that it owed him. He sued and he won. The judgment was for $378,000 — more than twice the amount of the bonus plus another $94,000 in attorneys’ fees.

Disputes over unpaid bonuses, like Joseph Wall’s, are heading to court at an increasing rate. Layoffs and corporate belt-tightening have contributed to this trend, but the driving force behind the rise in bonus litigation is a state law that says an employee can recover double damages and attorneys’ fees for unpaid wages.

Two weeks ago, the Connecticut Supreme Court ruled that Wall’s bonuses should be considered part of his “wages” for the purposes of the unpaid wage law. This decision turned his $120,000 breach of contract case into a $378,000 wage law judgment.

This may seem like bad news for employers, but the state Supreme Court issued another decision just two months earlier with a seemingly opposite result. The earlier case involved a prominent New London law firm and a junior attorney who was on his way to becoming one of the state’s most successful trial lawyers. Like Wall, the star attorney claimed that his former employer failed to pay a contractual bonus and that the wage law should apply. The Supreme Court disagreed. The lawyer was entitled to his bonus and interest, but nothing more.

So why was one employer forced to pay double damages and attorneys’ fees for an unpaid bonus while another “escaped” with a judgment for just the bonus plus interest?

According to the court the key difference was that Wall’s contract included a straight forward formula for calculating his bonus while the lawyer’s contract did not. The attorney’s contract with his law firm was vague enough to support a breach of contract claim, but the stakes in a wage law case were much higher. Fairness and due process required more than an ambiguous right to an undefined bonus if an employee seeks double damages and attorneys’ fees.

So what should an employer do following this year’s bonus season at the Connecticut Supreme Court?

At the risk of oversimplifying the law, employers can follow three important steps to limit the risk of one day writing “bonus” checks for double damages and attorneys’ fees.

1. The payment of bonuses should be discretionary. In both cases decided this summer, a trial court determined that the bonuses were contractually required. With Wall, the contract explicitly included bonuses. In the lawyer’s case, his contract did not address bonuses, but a court was able to interpret the agreement to include the bonus because the contract was poorly drafted. In either case, a clearly written contract that explicitly stated that bonuses would be paid at the employer’s discretion could have avoided any judgment against the employer.
2. The amount of bonuses should not be fixed. Courts do not like to pick numbers out of the air. That is one reason why the court ruled that the star lawyer’s bonus should not be considered wages. His contract did not include hard numbers. Although a court was willing to look at prior bonuses to “fill in the blanks” in a breach of contract claim, wage law cases are treated differently because violations can result in significant criminal and civil penalties. Avoiding fixed bonuses — both in writing and in practice — will help employers avoid those penalties.
3. Do not use formulas to determine the amount of a bonus. Just because a specific bonus amount is not included in a contract doesn’t mean that an employer can dodge the wage law bullet. For the purposes of the wage law, a mathematical formula is just as good — or bad, depending on your perspective — as a specific number. This was the case with Wall. His contract did not include a fixed number but it had a bonus formula based on the profitability of the department he managed. While including a list of factors considered for bonuses can give an employer flexibility, hard quantifiable formulas can be used against an employer if a bonus dispute goes to court.

While these three steps can help businesses avoid running afoul of Connecticut’s wage law, the law can change directions quickly, as our state Supreme Court demonstrated this summer. Working closely with your personnel department and legal counsel can help you avoid these problems before they start.

Locational information becomes key element in some trials
By Mark Dumas

For the past decade, electronic discovery focused on finding digital evidence that had physical counterparts. Electronic mail had paper correspondence, spreadsheets had ledgers, and databases had catalogs. From this perspective, e-discovery was litigation’s Six Million Dollar Man. It made searching for evidence “bigger, faster, stronger” (and more expensive), but it was ultimately just super-charged paper discovery.

Technologically savvy attorneys eventually took a step beyond viewing e-discovery as just electronic paper by focusing on meta-data, hidden information about the properties of electronic files. While this approach was useful, meta-data never became the evidentiary gold mine that some thought it could be. But now a growing internet trend and the pervasiveness of GPS technology may mark the beginning of a new focal point for e-discovery that could have lawyers sounding a lot like real estate agents. The next wave of e-discovery will be about location, location, location.

Descriptive Data

Unlike meta-data, the nature of “locational data” is easy to understand. It is data that describes a person’s or object’s geographical position. This type of data helps your car’s GPS tell you how to get from your office to your daughter’s soccer game or lets your bank know that someone just used your ATM card in Cabo San Lucas. Locational data is nothing new. It has always been a part of discovery and is found in records ranging from police reports to time cards to email return paths. What has changed is that the data is now more accessible, both in terms of availability and volume, and can be found in new places and forms.

While location may not always be important in every case, in some trials location is critical. For example, in a trade secrets lawsuit, the fact that an engineer visited a competitor’s offices sixteen times in three months could force an early settlement. In a truck accident case, the fact that a driver passed through an intersection thousands of times can convince a jury that the driver should have known that the intersection was dangerous. And what if a social networking website says that an employee was in Las Vegas when he called in sick? You may have a winning defense when he later files a discrimination complaint.

Locating Data

Understanding the importance of locational data is only the first step in using it to win your case. As with most types of evidence, finding it is the problem.

One of the easiest places to look for locational evidence is cell phone records. Cell phone records contain not only the telephone numbers that a caller dials, but also the geographical location from where the owner made the call. Some cell phone companies include this information in detailed billing summaries, but in most instances the information will need to be requested from the service provider. Police investigators have used this approach for over twenty years, but in recent years this information has become more accessible and easier to understand.

Data from Global Positioning System (GPS) devices is another obvious — and incredibly useful — source of locational data. Many companies retain GPS data from cell phones and vehicles for logistical, productivity, and disciplinary purposes. When you think a business in your case uses GPS technology, it is important that you immediately demand that the other side preserve that evidence. Some companies save GPS records for only short periods of time — occasionally for less than a day. Alternatively, GPS service providers for both corporations and individuals often retain GPS records for their customers and are already accustomed to providing this information to law enforcement or companies conducting internal investigations.

A third place to find locational data is from location-based social networking services like Foursquare, Gowalla, and Google Latitude. Location-based social networking services differ from traditional social networking websites because they focus on users’ locations instead of on their comments, photographs, and videos. Although each service has its own features, many involve users “checking in” at stores and restaurants using GPS-enabled cell phones. Users who “check in” can receive discounts and suggestions about nearby businesses, post reviews, and make connections with other users at the same location or with friends who are nearby.

While most social networks have privacy settings that make it difficult to obtain locational data without a discovery request or subpoena, many of these services allow users to cross-publish “check-ins” on traditional social networking sites like Facebook and Twitter where the information may be publicly posted. Even if you can find location-based social networking data without formal discovery, requesting data from the social networks themselves can be helpful if you need more detailed data or information about a business or location rather than an individual.

Using the Data

While finding locational data may not always be easy, using it effectively can be just as challenging. Sometimes this information can provide a “gotcha” moment if a witness lies about his whereabouts or if a party’s location is the key to the case. More often, locational data will only provide an extra point to support the theme of your case.

Some of the less dispositive ways that attorneys can use locational data include showing that an injured plaintiff is leading an active lifestyle, demonstrating that there was a pattern of complaints at a business, or by using location-based social networks to find potential witnesses who were at a location on particular date or who may have interacted with a party. Locational data also provides a great opportunity to provide juries and fact finders with demonstrative evidence that can break-up the monotony of testimonial and documentary evidence.

E-discovery of locational data may never be as valuable as the “smoking gun” e-mail or a favorable eyewitness, but changes in technology and the growing popularity of GPS and mobile internet devices will continue to provide more and new types of evidence for attorneys to use and understand.

Ruling limits First Amendment protections for public sector employees
By Mark Dumas

Public sector employees are often bold in their criticism of superiors, particularly where unions provide an inflated sense of job security. But when criticism becomes disruptive, supervisors often want to “throw the book” at cantankerous employees. Although disciplining an employee who is critical to the point of disruption may result in better government, such actions have historically risked violating state and federal law that protects government employees from retaliation for speech protected by the First Amendment. After all, wasn’t the First Amendment created to allow criticism of public officials?

Two relatively recent cases, Garcetti v. Ceballos, 547 U.S. 410 (2006), and Weintraub v. Board of Education, 593 F. 3d 196 (2d Cir. 2010), help answer that question in way that has made it easier for government employers to defend First Amendment retaliation cases. Ironically, one of the decisions involves an employee who literally had a book thrown at him.

Matters of Public Concern

Government employees’ First Amendment rights are protected in Connecticut by a line of federal cases reaching back to the 1960s and by Connecticut General Statutes § 31-51q. Because interpretation of the state statute relies heavily on federal case law, federal standards often dictate how a court will decide a First Amendment retaliation case even if the claims are based on the state statute.

For nearly forty years, federal courts decided government employees’ First Amendment retaliation claims by weighing the interest of the employee in speaking on “matters of public concern” against the employer’s interest in operating the workplace efficiently and effectively. The problem for public sector employers was that the first part of this balancing test — whether the speech was on a matter of public concern — could easily be answered yes for almost any critical speech related to a government employer.

Courts continued to add layers and exceptions to what became known as the Pickering-Connick test, but balancing tests can be frustrating because they can result in arbitrary and unpredictable decisions. Although the Pickering-Connick test was engaging for attorneys, it was maddening for employers. The U.S. Supreme Court partially resolved this problem in Garcetti v. Ceballos.

The “Official Duties” Test

In Garcetti, the Supreme Court sharply narrowed the scope of the Pickering-Connick test by creating a bright line rule that avoids any First Amendment scrutiny in most employee discipline cases. As a result, courts will not even reach the issue of whether employee speech is a matter of public concern if the speech at issue was pursuant to an employee’s “official duties.”

The plaintiff in Garcetti, Richard Ceballos, was a Deputy Assistant District Attorney in Los Angeles assigned to a case where the defendant planned to challenge a critical search warrant. Ceballos conducted his own investigation and concluded that the warrant contained serious misrepresentations. He reported his concerns to his supervisors and was subsequently reassigned to a different courthouse and denied a promotion. Ceballos then filed a lawsuit claiming that he was retaliated against because of the critical report in violation of his First Amendment rights.

In a 5-4 decision, the Supreme Court ruled that the Los Angeles County District Attorney’s Office did not violate Ceballos’ First Amendment rights. The court held that, since it was part of Ceballos’ job to report concerns about the validity of search warrants, he was speaking as an employee and not as a citizen for First Amendment purposes. Because of this, he was still subject to employer discipline regarding the report. As the court noted, “When he went to work and performed the tasks he was paid to perform, Ceballos acted as a government employee. The fact that his duties sometimes required him to speak or write does not mean his supervisors were prohibited from evaluating his performance.”

One prominent whistleblower attorney described this decision as “the single biggest setback for whistleblowers in the courts in the past 25 years,” but it was unclear how the new “official duties” test would be applied in the Second Circuit, which includes Connecticut, until earlier this year.

Garcetti in the Second Circuit

While several courts of appeal addressed Garcetti in depth shortly after the opinion was issued, the Second Circuit was a relative late comer to the Garcetti debate. Although the case was cited in passing in dozens of decisions, the circuit’s first significant analysis of Garcetti came earlier this year in Weintraub v. Board of Education, a case involving a public school teacher in Brooklyn, New York.

David Weintraub was a fifth grade teacher in New York’s P.S. 274. Three months into his first year, a student threw a book at him. Weintraub reported the incident to his immediate supervisor, but the assistant principal returned the student to the classroom without any punishment. The next day, the student threw more books at the first year teacher. Weintraub threatened to file a grievance if the student was not disciplined. The student was not punished and Weintraub filed a grievance. He subsequently received negative classroom evaluations, was eventually terminated, and then filed a lawsuit alleging that he was retaliated against for criticizing his assistant principal and for pursuing the grievance.

Before the Second Circuit, Weintraub argued that Garcetti’s “official duties” test should be limited to speech that was required of an employee. Since the board of education’s policies, handbooks, and his job description did not include any mandate that he file a grievance about how the assistant principal administered student discipline, he argued that his criticism of his supervisor should be protected.

In a 2-1 decision, the Second Circuit rejected his argument, relying in part on language from Garcetti stating that “an employee’s written job description is neither necessary nor sufficient” to determine the scope of an employee’s official duties for First Amendment purposes. The Second Circuit then created what is arguably an even broader standard than required by Garcetti by holding that a government employee’s speech that is “in furtherance of” his core duties is not protected by the First Amendment. Apparently “the book” didn’t even matter.

Play it Safe

Although Garcetti and Weintraub signal an important shift in First Amendment retaliation cases that favors public sector employers, local governments should still proceed with caution in cases involving employee speech. Both cases were decided by the smallest possible majorities — a single judge — which suggests that future cases will create exceptions and limitations on the broad defense that Garcetti and Weintraub have created. Although bright line rules like the “official duties” test may provide more clarity and peace of mind for disciplinary decisions, they also tend to fade over time. Regardless of how bright the line is, you are best served by avoiding it.

By Andrew Crumbie and Mark Dumas

For Connecticut municipalities, Ricci v. DeStefano, otherwise known as the New Haven firefighters lawsuit, was easily this year’s most watched Supreme Court case, but was Ricci this term’s most important Supreme Court decision for local cities and towns? If we told you that another civil rights case from this term has been cited in 1,422 opinions in less than the four months compared to 20 opinions citing Ricci in two months, would you wonder why you have not heard more about the more widely cited case?

For those of you who are still with us instead of searching for another article on Ricci, it is time to take a second look at Ashcroft v. Iqbal, a civil rights case in which a cable technician who was living on Long Island was arrested after the September 11th terrorist attacks and allegedly abused in a federal detention center in Brooklyn.

Javaid Iqbal, a Pakistani Muslim, believed that he was a victim of racial profiling, but he did not have the benefit of eight years of independent examinations into Bush administration anti-terrorism policies. When his lawyers filed his civil rights complaint, the allegations contained the legal elements of several civil rights claims, including allegations of supervisory liability for the Attorney General and FBI Director, but the complaint was admittedly thin on facts. Those facts, his lawyers believed, would be found during discovery. Mr. Iqbal’s case survived a motion to dismiss and the Second Circuit then affirmed that ruling. But, in a 5-4 decision, the Supreme Court overturned both lower courts in what has quietly become one of the most controversial opinions of the October 2008 term.

So why is Iqbal so controversial – aside from the now standard allegations of the Bush Administration behaving badly? There are two primary reasons. The first is that the Iqbal court has made federal pleading requirements much more stringent, with some claiming that it marks the end of federal notice pleading. That holding has elicited vast majority of the citations and scholarly criticism of the decision. For many government officials, however, the second holding in Iqbal is just as important, because, as Justice David Souter suggests in a pointed dissent, the majority opinion arguably does away with supervisory liability in public sector civil rights cases.

The Death of Notice Pleading?

Although the Iqbal court reaches the issue of pleading requirements after addressing “supervisory liability,” the claim that this decision marks the so-called “death of notice pleading” – or in the words of Justice Ruth Bader Ginsburg “messed up the Federal Rules” – represents the most significant impact of the case on municipal litigation.

Following Iqbal, it is now clear that a bare bones recital of tort elements from a legal form book is not enough to survive a motion to dismiss. Iqbal established a new general pleading standard in which the “conclusory nature” of formulaic pleadings “disentitles them to the presumption of truth.” Instead of merely presuming the truth of every allegations in a complaint, a court must now follow a two-pronged approach in which it first identifies conclusory pleadings that are “not entitled to the assumption of truth.” Then, if “there are well-pleaded factual allegations,” a court must determine “whether they plausibly give rise to an entitlement to relief.” The plausibility standard is not a “probability requirement,” but rather “asks for more than a sheer possibility that a defendant has acted unlawfully.”

This “plausibility” determination will leave much to the discretion of the trial court, since, as the court noted, “Determining whether a complaint states a plausible claim for relief will … be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” This reliance on “common sense,” which many in academia fear will too often result in premature dismissals, is at the root of much of the growing controversy surrounding Iqbal.

The Demise of Supervisory Liability

But the secondary holding in Iqbal, namely that supervisory liability is inapplicable in Bivens and Section 1983 cases, has also sparked vociferous criticism of the majority opinion, most notably from Justice Souter, and it is a dispute that, in many ways goes back thirty years.

Since 1979, when the Supreme Court decided Monell v. New York City Deptartment of Social Services, it has been settled that governmental entities cannot be held vicariously liable in Section 1983 actions for unconstitutional acts of their employees under the doctrine of respondeat superior. This doctrine, for those without easy access to their Latin-to-Lawyer dictionary, states that an employer is, in some instances, subject to liability for torts committed by employees acting within the scope of their employment. Despite this exclusion of liability, nearly all of the federal circuits have recognized some form of Section 1983 “supervisory liability” where a superior can be held liable for constitutional violations by their subordinates.

In the Second Circuit, supervisory liability could be could be found if the superior official had “personal involvement” in the deprivation of constitutional rights. Such personal involvement could be established by: (1) directly participating in the violation, (2) failing to remedy the violation after being informed of it by report or appeal, (3) creating a policy or custom under which the violation occurred, (4) gross negligence in supervising subordinates who committed the violation, or (5) by being deliberately indifferent to the rights of others by failing to act on information that constitutional rights were being violated. This standard, which was explicitly relied on by the Second Circuit in affirming the district court in Iqbal, was rejected by a majority of the Supreme Court.

Speaking for the court, Justice Anthony Kennedy renounced both the term “supervisory liability” and the position that “knowledge and acquiescence” of discriminatory classifications amounts to a supervisor’s violating the Constitution. The court held that, “[T]he term ‘supervisory liability’ is a misnomer .Absent vicarious liability, each Government official, his or her title notwithstanding, is only liable for his or her own misconduct.” As Justice Kennedy concluded, purpose, and not “mere knowledge” of unconstitutional discrimination, is necessary to impose Section 1983 liability.

Conclusion

Although both holdings in Iqbal bode well for municipalities, we should not prematurely announce the death of notice pleading and superior liability since the decision will likely spur a new round of questions and theories that will challenge both the contours of Iqbal and the “common-sense” that the court hopes will guide us.

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Beware of Data Floating in the Clouds:
Internet-based operating programs can pose headaches for litigators

It seems like every few months lawyers who want to stay on the cutting edge of technology need to learn a new catch phrase. The lawyer in the next office “blogs,” another one spends his day “tweeting,” and a particularly lucky attorney somewhere in Meriden has a “paperless office.” Now some lawyers are even “litigating in the clouds” – and I am not talking about that ponytailed lawyer who wears sandals to court.

What is cloud computing?

The latest hot technology topic for lawyers is “cloud computing.” At its core, cloud computing involves storing information and operating computer programs on the internet instead of on local computers or servers. The technology can be as simple as web-based email and as complex as running programs that required super computers just a few years ago.

As an example of cloud computing, this article was written using a service called GoogleDocs. Instead of using the word processing program on my computer, I opened my internet browser, logged into my Google account, and I typed away. Although the word processing program I used and the file that I saved were located on computer servers somewhere, I never knew where those computers were located. While most of my writing is done at my office, you could say that this article was written in the clouds. You are probably already a cloud computing user yourself. Most web-based email services are an early form of cloud computing as are online banking, auctions websites like ebay, and that online poker tournament that your son just won instead of studying for tomorrow’s math test.

The benefits of cloud computing

In addition to these seemingly trivial applications, more and more companies are shifting to cloud computing because it reduces costs, increases electronic storage capacity, and allows employees to access and use computer resources from any location and with increasingly smaller devices. In some instances, companies have shifted their entire core computing functions to internet based applications. This practice is becoming more common for companies who provide knowledge based services or for sales-based businesses.

Many of those sales-based businesses use a popular cloud computing service that helps users shift their entire sales and marketing program onto the internet, including hosted customer databases and lead generation software. A web browser and an internet connection are all that their salespeople need to do their jobs. So what happens if the leading salesperson from one of these companies continues to use the company’s account after leaving for a competitor or if she exports the firm’s customer relations database to her own account? You guessed it. That company will soon be litigating in the clouds.

Cloud computing and electronic discovery

But cloud computing is not just about trade secrets litigation or the practical challenges that a new technology creates for clients. This trend also creates significant issues for electronic discovery. Many of the electronic discovery challenges that are created by cloud computing, like complying with electronic discovery requests, document retention, and litigation holds, are topics that many trial lawyers have dealt with in the past. Hosting data and applications externally, however, also creates a new set of obstacles and strategic concerns that trial lawyers should consider at the earliest stages of a case.

The first step that you should take when cloud computing is a factor in a case is to assess your client’s use of cloud computing. If your client uses cloud computing applications, you will need to ask about their records management policies and their ability to place litigation holds on externally hosted data. Although larger corporate clients will already have records management policies in place, such policies vary widely based on the sophistication of the client and its regulatory environment.

The second step that you should take is to review the relevant cloud computing service-level agreement. Even if your clients have well crafted records management policies, those policies may become meaningless if the service agreements do not include provisions that effectively implement the company records management policies. For example, if a client’s policies says that emails should be deleted after six years, but those emails are still available “in the cloud,” then you may have an obligation to produce those emails. Some of the service agreements from Google, arguably the leading cloud computing service provider, state that “deleted” data may remain on its backup systems in perpetuity, which makes this much more than an academic concern.

Another problem that may become apparent from reviewing the service agreements is that some agreements do not provide for effective implementation of litigation holds. In some cases, this is by choice and in others instances the provider simply does not have the technical capabilities to implement a hold based on its network infrastructure. Regardless of the reason, critical records may be lost if a company’s decision to host its data online did not include requiring a mechanism for litigation holds. The cost of this decision could be court sanctions or, worse yet, the inability to recover key data that could win your case.

Possession, custody, and control of data in the cloud

An additional issue that this technology raises is the question of who has possession, custody, and control of data stored with a cloud computing service. Although most service agreements make it clear that the client owns and controls the data, this may not apply to server logs, version histories, and other data that may reveal important facts. Many cases could be won or lost if version histories, which are common in many cloud computing applications, show that a critical employee accessed a key file when that employee has otherwise claimed ignorance. Some service providers may try to avoid disclosing such logs or data for internal reasons, but they may not have a choice if that information is subject to a subpoena. Worse yet, if the service agreement does not require that the provider notify clients about subpoenas, this information may be disclosed to opposing counsel or government investigators without your knowledge.

Conclusion

Finally, it is important to remember that discovery of information stored with a cloud computing host applies to the other parties as well as your own client. While you may fear the unseen subpoena or the zombie email that was never really deleted, opposing counsel has the same concerns. But, with a basic understanding of the technology, you can help make sure that the facts that fall from the sky help your case instead of theirs.

By Andrew R. Crumbie and Mark Dumas

Occupational fraud can impact almost any business from multinational conglomerates to your local deli. When fraud occurs, it almost always has a major impact on a company’s bottom line. One recent study by the Association of Certified Fraud Examiners (“ACFE”) estimates that fraud resulted in a seven percent loss of revenue for participants in the study. You do not need a lawyer or accountant to tell you that a seven percent loss in the current economy can be the difference between keeping the lights on and going out of business.

What is occupational fraud?

In its simplest form, occupational fraud can be defined as a misuse of company resources for personal gain. Two-thirds of occupational frauds are committed by individuals, but the remaining third of fraud cases often result in the most significant losses. Corporate fraud, in contrast, is fraud committed by an organization rather than individuals and can include instances of occupational fraud.

Outright theft and misuse of company assets are two obvious examples of occupational fraud, but more subtle misconduct is often more damaging. Twenty-three percent of fraud cases at businesses with less than 100 employees result from some form of corruption and more than sixty percent of those losses result from conflicts of interest. Such self dealing or favoritism may be more difficult to detect, but can have a direct and negative impact on a company’s balance sheet.

What are the costs of occupational fraud?

The financial costs of fraud are not difficult to understand. ACFE’s study estimates that fraud resulted in approximately $944 billion in losses in 2008 and the rate of occupational fraud has increased in recent years. The reported rise in occupational fraud may be the result of better detection, but it underscores the magnitude of the financial damage that can be sustained by a company struggling to remain profitable in a challenging market.

As significant as these the direct costs have become for businesses, the consequential damage to a company’s brand, reputation, and customer and investor relationships can be just as important. With larger companies, the risk of government investigations, fines, and legal fees only compounds the problem. Companies now face increased scrutiny from prosecutors and regulators who have been given a mandate from top officials to be tough on corporate fraud. This is certainly true with the new Obama Administration, which has said that, “It will be a top priority of the Justice Department to hold accountable executives who have engaged in fraudulent activities.”

So what can a business do in the face of these financial and regulatory challenges? One answer is to create or improve a company compliance and ethics programs.

What is a compliance and ethics program?

According to the Federal Sentencing Guidelines for Organizations, there are two primary requirements for an effective compliance and ethics program. The first is that a company must exercise due diligence to prevent and detect criminal conduct. The second is that a company must promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. Stated more succinctly, a compliance and ethics program sets out a company’s commitment to play by the rules and to make sure that its agents and employees live up to that commitment.

Playing by the rules might seem to be an obvious goal for most businesses and in certain contexts a formal compliance and ethics program may appear to be an unnecessary, particularly with small businesses. The rules for your local deli are simple. Don’t steal from the register or skimp on the pickles. But creating an effective compliance and ethics program is not that easy, even for a small business like a sandwich shop. A mom and pop business might not have to worry about the Foreign Corrupt Practices Act or money laundering statutes, but they still must confront compliance with OSHA regulations, wage and hour requirements, and employee misconduct.

A business can start to reduce the risks of occupational fraud and violating the law by following five simple steps:

1. Identify the laws and regulations that apply to the company and its employees and agents;
2. Identify where the company, employees, and agents risk breaking the law or committing fraud;
3. Develop procedures to lessen or prevent the risk that fraud will be committed or laws will be broken;
4. Train and educate company officers, employees, and agents so that they understand the company’s ethics and compliance guidelines; and
5. Conduct compliance audits and monitoring to ensure that the program is effective.

Experienced accountants, attorneys, and consultants can help companies address each of these steps and identify cost effective methods for reducing losses. The techniques that can be used can range from a simple fraud hotline, which has been shown to reduce losses by up to sixty percent, to skilled audits and investigations. These steps may seem costly now, but failing to create an effective compliance and ethics program can result in higher litigation and compliance costs in the future.