Corporate Counsel Connect collection

January 2016 edition

Antitrust compliance programs; IP and data protection issues for 2016; New audit rules for partnerships

Antitrust compliance programs

A recent DOJ sentencing memorandum highlights how companies can mitigate antitrust risk through effective antitrust compliance programs.

In United States v. Kayaba Industry Co., the DOJ recommended a significantly reduced fine for price-fixing due to Kayaba's implementation, during the investigation, of a comprehensive antitrust compliance program. The DOJ highlighted that Kayaba's top management took the lead in creating a compliance program that included:

Training, and subsequent testing, for all senior management and sales personnel, with enhanced training for those in positions with a high risk of antitrust violations.
Prior approval, when possible, of meetings and communications with competitors.
Reporting and auditing of all meetings and communications with competitors.
Sales personnel certifications that any prices were determined independently without exchanging information with competitors.
An anonymous hotline for employees to report possible antitrust violations.

The DOJ has recently appeared more open than in the past to providing guidance and giving credit for effective antitrust compliance programs. In a 2014 speech, Deputy Assistant Attorney General Brent Snyder stated that, at a minimum, a compliance program must:

Start at the top, ensuring that compliance is part of the company's culture.
Cover the entire organization.
Be proactive.
Discipline employees who commit antitrust crimes.
Prevent violations from reoccurring.

Companies should consider whether their antitrust compliance programs satisfy these elements. In addition, even after an antitrust investigation has begun, companies may receive credit if company leadership commits to strengthening an antitrust compliance program that failed to stop a violation.

For resources to assist counsel in conducting an antitrust audit and implementing a compliance program, see Antitrust Compliance Toolkit.

IP and data protection issues for 2016

Counsel should monitor several anticipated developments in IP and data protection law. Developments expected to have implications for corporate policies relate to:

Willful patent infringement. The US Supreme Court will review two cases (Halo Electronics, Inc. v. Pulse Electronics, Inc. and Stryker Corp. v. Zimmer, Inc.) on the willfulness standard. If the Supreme Court rules in favor of the more lenient “totality of the circumstances” test, counsel should consider adjusting the company's freedom to operate procedures as needed to address the increased threat of treble damages.
Patent subject matter eligibility. Recent precedential Federal Circuit decisions on patent-eligible subject matter may face judicial review in 2016, including the Ariosa Diagnostics, Inc. v. Sequenom, Inc. decision on “products of nature,” which is subject to a petition for rehearing en banc. With decisions trending away from patentability in 2015, counsel for biotechnology and other technology companies should look out for further guidance and modify internal patentability review and litigation defense strategies accordingly.
EU-US data transfers. Following the European Court of Justice's decision in Maximillian Schrems v. Data Protection Commissioner invalidating the safe harbor for EU-US data transfers, counsel should monitor the progress of a new data transfer agreement, expected in early 2016. In the interim, counsel should consult with their information technology teams to understand the company's data flows and consider contingency plans for lawful data transfer.
Regulatory enforcement. In 2015, the Third Circuit affirmed in FTC v. Wyndham Worldwide Corp. the FTC's authority to pursue claims against companies challenging the adequacy of their data security practices. Currently, dozens of claims by regulatory agencies are pending against US companies. Given that this trend is expected to continue in 2016, companies should assess their cybersecurity programs and document measures taken to avoid cyberattacks and other data risks.

For information on the law governing patent subject matter eligibility, see Practice Note, Patent-Eligible Subject Matter.

For information on the FTC's enforcement authority and data security guidance, see Practice Note, FTC Data Security Standards and Enforcement.

New audit rules for partnerships

Recent legislation has significantly changed the rules for partnership audits, making it easier for the IRS to audit partnerships (including limited liability companies (LLCs) taxed as partnerships) and assess and collect tax deficiencies. These changes will likely lead to increased partnership audits and may require changes to partnership and LLC agreements. The new rules apply to partnership tax years beginning on or after January 1, 2018.

Significant changes to the partnership audit rules include:

Under the default procedure, the IRS will assess and collect taxes, interest, and penalties relating to partnership audit adjustments from the partnership. Absent an election, current-year partners will therefore bear the economic burden of tax liability from prior years even though they may not have been partners during the audited year. However, partnership-level tax liability can be shifted back to the audited-year partners to the extent those partners file amended returns and pay taxes on the increased tax liability.
A partnership representative (who is not required to be a partner) will have the sole authority to represent the partnership in audits and judicial tax proceedings.
Partners have no right to participate in audits or judicial proceedings, and are not entitled to notice of audit proceedings. Partners may therefore want to negotiate rights to limit the partnership representative's ability to act without partner consent.

To avoid payment of tax deficiencies at the partnership level, a partnership can elect an alternative procedure to issue adjusted Schedule K-1s to the persons who were partners during the audited year. If an election is made, any adjustments are taken into account by the audited-year partners on their own tax returns (with interest paid at a higher rate). Partnerships should consider whether to make clear in the partnership agreement whether the partnership is following the default procedure or intends to elect this alternative procedure. Partnerships with 100 or fewer eligible partners can elect annually out of the new partnership audit rules. For these partnerships, tax deficiencies will be assessed and collected at the partner level.

About Practical Law

This look at the major issues on the horizon for corporate counsel comes from Practical Law – an online legal know-how service. View all the looming issues now – compliments of Practical Law The Journal, which covers the latest transactional and compliance topics that impact your practice. To gain access to more related know-how resources, please visit www.us.practicallaw.com.