Merging companies may face a greater risk of lengthy investigations and possible antitrust challenges under new merger guidelines proposed by the Federal Trade Commission (FTC) and the Department of Justice (DoJ) on April 20, 2010 (the Proposed Guidelines).

The Proposed Guidelines generally expand the range of analytical tools and types of evidence the agencies use to predict the effects of a merger on competition. Therefore, companies may experience longer investigations and broader requests for documents and data.

Specific changes proposed by the FTC and DoJ include:

However, the Proposed Guidelines do not provide much guidance about what evidence or analytical results the agencies would find persuasive when deciding whether or not to enjoin a transaction.

The net effect of the Proposed Guidelines may be a greater number of mergers challenged by the DoJ and FTC, which is consistent with the Obama administration's prior announcements concerning policy shifts towards increased antitrust enforcement. Because of the significant number of public comments being drafted on the Proposed Guidelines, the FTC extended the public comment period until June 4, 2010.

Companies running advertisements that include testimonials or attempting any word-of-mouth marketing campaigns should carefully review the Federal Trade Commission's (FTC) updated Guides Concerning the Use of Endorsements and Testimonials in Advertising (the Guides).

The FTC recently disclosed its first investigation of a company's endorsement arrangement with internet bloggers since the Guides were updated in October 2009. In January 2010, Ann Taylor LOFT invited bloggers to attend a preview party for a new collection. Every blogger that reported on the event within the 24-hour period received a gift card. The company posted a sign at the event advising bloggers to disclose the receipt of the gift cards, but the FTC doubted whether many of the bloggers saw the sign.

In the end, the agency took no action against the company. However, the investigation demonstrates the FTC's willingness to investigate companies that attempt to leverage word-of-mouth coverage from bloggers as part of their marketing campaigns.

The Guides help advertisers navigate the complex and sometimes ambiguous requirements of the FTC Act, including the requirement to disclose any "material connections" between a company and individuals who publicly endorse or promote its goods or services. Under the revised Guides, the FTC considers a blog post regarding a product or service to be an endorsement if the blogger receives cash or in-kind payment from the company.

Companies that fail to comply with the requirements on testimonials and endorsements under the FTC Act can be subject to fines for each separate offense.

For more information on using endorsements and testimonials, see Practice Notes, Online Advertising and Marketing and Social Media Risks and Rewards: Endorsements and Testimonials.

With more and more companies taking legal action against competitors who run comparative advertisements, companies running these campaigns should take extra care to ensure that any comparative claims they make can stand up to scrutiny. A successful claim for false, deceptive or misleading advertisements can be expensive for a defendant and result in a loss of consumer confidence in its products or services.

Generally, comparative advertising identifies and compares competing goods or services based on specific attributes such as performance, price or features. To reduce the risks, a company that is considering making comparative claims should first:

With proposed amendments to Rule 163 likely stalled until later this year (if they are adopted at all), well-known seasoned issuers (WKSIs) have one more reason to get a shelf registration statement on file with the SEC.

In December 2009, the SEC proposed amendments to Rule 163 under the Securities Act intended to permit underwriters to confidentially pre-market a proposed securities offering to selected investors for their WKSI clients to ensure there is sufficient investor interest before announcing the deal publicly. Underwriters can currently do this on behalf of a WKSI only if the WKSI has a shelf registration statement on file that covers the securities the WKSI proposes to offer. The proposed rule changes, if adopted, would allow underwriters to confidentially contact investors on behalf of their WKSI clients even if they do not yet have a shelf registration statement on file, provided certain specified conditions are met.

The comment letters submitted to the SEC by the deadline in January were generally supportive of the rule changes. However, comments submitted by the Credit Roundtable (a group of fixed income investors) after the comment period ended raised concerns that the proposed changes to Rule 163 would further expedite the offering process and give investors even less time to make a decision regarding an investment (although the comment comes in the context of debt securities where investors have little time to digest the terms of the securities before being required to make their decision).

As a result of the concerns raised by these investors and the SEC's increased focus on investor protection, the SEC staff has indicated informally that it will postpone consideration of the rule changes until later this year.

In the meantime, to benefit from confidential pre-marketing, WKSIs that do not already have a shelf registration statement on file should file an automatically-effective shelf registration statement that covers common stock.

For more information on pre-marketing as a financing technique and Rule 163, see Practice Note, Bringing Investors Over the Wall.

Public companies should be prepared to respond to SEC comments on their 2010 proxy statements. This includes requests for information on the processes that companies used to determine that their compensation policies and practices are not reasonably likely to have a material adverse effect on the company.

The SEC has begun issuing comments related to its new proxy disclosure rules. One common theme is the requirement to discuss risks from compensation practices that are reasonably likely to have a material adverse effect on the company. The SEC does not require companies to affirmatively state that a company's compensation practices are not reasonably likely to have a material adverse effect on the company, but only to disclose policies and practices if they are reasonably likely to have a material adverse effect on the company. Many companies opted to make an affirmative statement, while many others chose to stay silent on the point in their disclosure.

Interestingly, however, both approaches have triggered the same SEC comment, which requests information on the processes used by companies to assess their compensation practices. The SEC is not requiring companies to disclose this information in future filings, but rather to include their explanations in their response letters to the SEC. Companies should be prepared to respond to the comment detailing the processes used to make the determination. The exercise of laying out the various steps the company undertook in the company's response to the SEC comment may push the relevant persons at the company to re-evaluate the processes they used to review compensation policies and practices and consider whether to change the processes for next year.

For information on market practice related to the SEC's new proxy disclosure rules, see Practice Note, What's Market: New Proxy Disclosure Enhancements. For a form letter to the SEC in response to SEC comments on a company's periodic reports, see Standard Document, Response to SEC Comments: Periodic Reports.

Foreign Corrupt Practices Act (FCPA) enforcement remains a priority for the DoJ and SEC.

April 2010 saw the imposition of what the DoJ called the "longest-ever" prison sentence for an FCPA violation. Charles Jumet, a VP of Ports Engineering Consultants Corporation, was sentenced to 87 months in prison. He had pled guilty to paying bribes to Panamanian government officials in exchange for maritime contracts.

Last year the COO and CFO of Nature Sunshine Products Inc. settled charges with the SEC for alleged FCPA violations on the part of its foreign subsidiary — even though they had no direct involvement with the wrongdoing. This was the first time in the 25-year history of the FCPA that the SEC had brought such charges.

To better control the risk of liability, companies should implement risk-based FCPA compliance programs and step up corruption due diligence in relation to outside agents, vendors and suppliers, acquisitions and joint ventures.

For current best practices in FCPA compliance, see Practice Note, Foreign Corrupt Practices Act: Overview and Article, Beyond Reproach: Achieving Best Practice in FCPA Compliance. For an analysis of the need for, and methods of, assessing corruption risk in the context of M&A, see Practice Note, M&A Due Diligence: Assessing Compliance and Corruption Risk.

In light of a recent US Supreme Court decision, companies should insist on arbitration clauses that express clearly whether or not the company agrees to class arbitration. They may also consider reviewing arbitration clauses in agreements dated on or after October 8, 2003, to determine whether those clauses should be amended to exclude class arbitration.

In Stolt-Nielsen S.A., et al. v. Animalfeeds International Corp., the Supreme Court held that parties cannot be forced under the Federal Arbitration Act to submit to class arbitration unless there is some contractual basis for determining that they agreed to do so. It reasoned that because class action changes the arbitration so drastically and fundamentally, an arbitrator cannot infer an implicit agreement to authorize class action arbitration simply from the fact that the parties agreed to arbitrate.

However, given that the parties in this dispute were sophisticated business entities, the court took the view that they presumably never intended that the arbitration clause in their agreements would allow class arbitration. The ruling might not therefore be decisive in disputes involving consumer or employee agreements.

In addition, a court may conclude that parties to a contract executed on or after October 8, 2003 that incorporates the American Arbitration Association (AAA) rules did agree to the possibility of class arbitration. On that date the AAA rules were amended to include the Supplementary Rules for Class Arbitrations setting out procedures for conducting class actions.

Separately, it is worth noting that if Congress enacts either version of the proposed Fairness in Arbitration Act (H.R. 1020 and S. 931), currently in committee in both the House and the Senate, mandatory binding arbitration clauses in pre-dispute consumer, employment and franchise agreements would be unenforceable in any event.

Recent IRS guidance permits employers with flexible benefit plans (plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits) to immediately allow employees to pay for medical coverage of adult children under the age of 27 on a pre-tax basis.

Employers that implement this policy must make sure that:

The IRS guidance also clarifies that the amounts paid by the employer and the employee for coverage of the employee's adult children under age 27 are excluded from the employee's gross income. The new income exclusions are effective retroactively to March 30, 2010 for plans that extended coverage to adult children immediately. However, health plans are not required to extend coverage to adult children until the first plan year beginning on or after September 23, 2010.

The US Supreme Court recently confirmed that a plan administrator of an employee benefit plan is entitled to a deferential standard of review on a new interpretation of plan terms, even if a court rejected the plan administrator's prior interpretation of the same terms.

Conkright v. Frommert is a good reminder that to receive the deferential standard of review afforded to plan administrators, companies should ensure that:

For sample wording giving a plan administrator power and authority to interpret and administer, in its sole discretion, an employee benefit plan, see Standard Clause, Model Firestone Plan Interpretation Language.

When it comes to determining what preventative technology to use in relation to any given process or plant, companies involved in high-risk environmental activities should take into account not only what is commercially available and what is regarded as industry standard, but also whether the use of certain technology is mandatory anywhere in the world.

The recent Gulf Coast oil spill is a good example. BP hired an offshore drilling rig that did not have an acoustic device used to stop the flow of oil in an emergency. The acoustic device is not required under US law (nor in the UK where BP is headquartered), but it is required in other oil-producing countries (Norway and Brazil). While it is unclear whether the acoustic device alone could have prevented the incident, the cost of the device is approximately $500,000. In contrast, BP spent up to $6 million a day in its efforts to contain what became one of the largest oil spills in US history.

Companies filing patent applications should be aware that the US Patent Office's duty of candor rule extends to all individuals associated with the company and "substantively involved" in the application's prosecution, not just the inventors and attorneys or agents filing the application.

The duty of candor requires that all information "material to patentability" be cited to the US Patent Office during the prosecution of a patent application (37 C.F.R. § 1.56). Failure to meet the duty of candor where the omission was material and made with deceptive intent can result in the unenforceability of the patent.

In Avid Identification Systems, Inc. v. The Crystal Import Corporation, the Federal Circuit affirmed a district court decision finding a patent unenforceable because the patentee's president failed to disclose a public demonstration of an earlier product version to the US Patent Office. The patentee's president was neither a named inventor nor the attorney or agent prosecuting the application. The Federal Circuit interpreted "substantively involved" to require that the involvement:

In Avid, the patentee's president owed a duty of candor because, among other things:

Employees may be entering into website click-through (or clickwrap) agreements that could in some circumstances bind the company without its knowledge. A recent federal district court case provides useful guidance on ways to reduce this risk.

In National Auto Lenders, Inc. v. Syslocate, Inc., a Florida federal district court found that because National Auto Lenders (NAL) had previously notified Syslocate that only certain NAL executives had the authority to enter into contracts, NAL was not bound by Syslocate's website click-through end user license agreement, which had been accepted by two other NAL employees.

To reduce risk, companies should consider:

Where appropriate, companies may also want to notify vendors of the specific employees that are authorized to enter into agreements on behalf of the company.

For a model company policy regarding proper use of employer IT resources and electronic communications systems see Standard Document, IT Resources and Communications Systems Policy.

The Gulf Coast oil spill, water contamination in Boston and the attempted bombing of New York's Times Square are reminders of the need for employers to create a well-designed emergency response plan.

Often employers pay for costly and detailed recommendations, but fail to develop a functional plan for an actual emergency. Employers should:

For information on health and safety law, see Practice Note, Health and Safety in the Workplace: Overview. For information on attorney-client privilege, see Practice Note, Internal Investigations: US Privilege and Work Product Protection.

Employers should check a new online database created by the US Department of Labor (DOL) to ensure that any employment enforcement data posted about their company is accurate. The database is likely to be regularly scrutinized by competitors, union organizers and, in particular, plaintiffs' attorneys.

As part of the Obama administration's push for greater transparency, the DOL recently announced an online database of enforcement data from the Wage and Hour Division (WHD), Office of Federal Contract Compliance Programs (OFCCP), Employee Benefits Security Administration (EBSA), Occupational Safety and Health Administration (OSHA) and the Mine Safety and Health Administration (MSHA).

It includes, for example, quarterly-updated information about the:

With the exception of OSHA and MSHA enforcement data, this kind of information has previously only been available by making a Freedom of Information Request, a process that can take weeks.

For more information on wage and hour investigations, see Article, Wage and Hour Investigations.

A recent Fifth Circuit Court of Appeals decision highlights the importance of understanding what is and what is not covered by the tax indemnity in your M&A deal documents.

Specifically, Marathon EG Holding Ltd v. CMS Enterprises Co. is a reminder for acquirors and deal lawyers to:

In Marathon, the Fifth Circuit held that tax attributes were not covered by what appeared to be a standard US tax indemnity in a stock purchase agreement. This was not a surprising result for most US tax practitioners because tax attributes are not usually covered by a standard US tax indemnity. However, the result may have surprised acquirors and deal lawyers, especially those who routinely factor a target's tax attributes (particularly NOLs) into deal pricing.

Outside the US, tax attributes are more frequently a standard covered item in a tax indemnity. The US market approach of excluding tax attributes from a tax indemnity may change as M&A deal activity picks up because potential targets are likely to have significant NOLs resulting from the financial crisis, and the value of those NOLs may be an important element in deal pricing.