On December 7, 2009, the U.S. Patent and Trademark Office (“PTO”) announced, in conjunction with the United Nations Framework Conference on Climate Change being currently held in Copenhagen, Denmark, an expedited procedure for pending “Green Technology” patent applications called the Green Technology Pilot Program (“Pilot Program”). This announcement was greeted with a bit of fanfare and eager anticipation, as the normal pendency for examination of the application can be up to 30 months. But the pilot program is limited to the first 3000 petitions. Here are the specifics:

• Must have a pending patent application as of December 8, 2009 (effective date of Pilot Program)
• The subject invention must be for a “Green Technology,” which includes applications pertaining to environmental quality, energy conservation, development of renewable energy resources or greenhouse gas emission reduction)
• The normal government petition fee of $130 is waived
• Do not need to meet all of the requirements to make the application “special for purposes of expedited
• All petitions must be filed by December 8, 2010 or until the first 3000 petitions are received
• The petition must be filed through the PTO's electronic filing system (PAIR)
• Petition must be filed meeting the following:
• Pending non provisional application (not a reissue)
• Must meet the technology classification
• Cannot contain more than 3 independent claims and a total of 20 claims
• No multiple dependent claims
• Can concurrently file a preliminary amendment to cancel claims to the required 3 independent/20 claims total limit
• Claims must be directed to a single invention
• Must include a statement regarding restriction practice
• Petition must state how the invention materially enhances the environment
• Petition must be filed at least one day prior to the date of an Office Action issuing (restriction requirement counts)
• Petition must be accompanied with a request for early publication and payment of publication fee (currently $300), but then publication fee not charged at Issue Fee time
• The PTO has suggested that the Pilot Program may be extended if successful.

The petition is a great thing if the invention clearly falls in the correct technology classifications, directed to a unitary invention, and has no greater than the maximum claim set allowed for the petition. If the petition to make special is approved, the Application will be examined out of turn on a fast track basis. This can cut a significant amount of time off an otherwise long few years of waiting for examination.

An applicant will need to contact its patent counsel as soon as possible to review the application and to see whether the application meets the requirements or if a preliminary amendment to cancel claims makes sense. While the U.S. Government has graciously waived the petition fee, the Applicant should expect a fair fee from counsel to review/counsel/prepare and file such a petition. Plus, there will be a government fee of $300 for the request of early publication, but this fee would have to be paid in any event. But under current practice, the Applicant is generally not hit with this fee until the Issue Fee is paid, thereby knowing that the application has been allowed. Thus, the PTO would get its publication fee early whether the patent application is allowed or not. Still, it may be a fair trade off for obtaining a patent in a green technology on a fast track.

For more information on the newly announced Pilot Program, go to: http://www.uspto.gov/news/pr/2009/09_33.jsp or http://www.uspto.gov/patents/law/notices/2009.jsp . For counseling regarding whether it makes sense to file a petition, contact your Patent Attorney.

The Proposed Restructure

Well, Senator Dodd, bless his heart, has come out with yet another proposal to restructure the financial regulatory system. If you haven't seen it, at its heart is a new oversight body called the “Financial Institutions Regulatory Agency” or “FIRA.” I think a more appropriate name would be the “Financial Institutions Regulatory Entity” or “FIRE."

While it probably has zero chance of passing as proposed, the bill is telling. By stripping the FDIC and Federal Reserve of their bank regulatory oversight functions – making the FDIC just an insurance agency and the Federal Reserve a monetary policy agency and eliminating the OCC and OTS as we know them, I interpret Senator Dodd to be saying “You all messed up – so we are going to start over again.”

Actually, the concept of a new, single financial regulatory agency is intriguing. At least it would centralize power and create some consistency. The downside is that word power – and the fear of its abuse.

Where Are We Anyway?

Unfortunately we are still in the middle of this mess. With real estate values still dropping in many locales, we are far from done. The implications are far reaching. Because of archaic accounting pronouncements, banks, steered straight off a cliff by the accountants, appraisers and regulators, are forced to write down “distressed” assets to fire sale values. Why no OTTI standards have been adopted for real estate is beyond me. We just continue to privatize the upside on real estate and publicly swallow the downside in large gulps.

The Scary Regulatory Environment

Folks, I am here to tell you things have only gotten worse. With each succeeding Inspector General Report, the regulators get more dogmatic and risk averse. Enforcement actions are flying. Three CAMELS ratings are embraced. The whole process and its aftermath are overwhelming to boards and management and the regulators themselves, who simply don't have the resources or necessary experience to properly address all the issues, many of which are self-created.

There is huge frustration on the part of management teams, including many good bankers just trying to survive this nightmare. Solutions that are an iota out of the box are shot down with no apparent thought or explanation. The mantra now is for common equity in capital raises, and failure is being considered over preferred stock injections.

Eliminating the Hostile Regulatory Environment

In hindsight, many banks took on too much risk and real estate concentrations. And, yes the regulators have a very tough job to do. However, the hostile environment we are operating under serves no one well.

The regulators , legislators, banks and their lobbyists must all take a step back and reconsider where we are at now, where we want to get and how best to get there without further scorching the earth.

The Irony of It All

The irony is that the banks are supposed to be at the heart of the economic recovery. However, with reduced lending limits, concentration ratios and tolerance for regulatory criticism, the banks just aren't lending much nowadays. Why a broad-based government guaranteed lending program has yet to be adopted is beyond me.

From the outside looking in on that “island surrounded by reality” which is known as Washington, D.C., Congress, the administration and the bank regulatory agencies all are on different C-SPAN channels. The disconnect is frightening.

Let's Put Out the Fire

So before adopting any new regulatory reform, let's figure out just what went wrong, put a meaningful plan together to fix it and go about the business of returning our banking system and economy to some semblance of stability. Otherwise, we truly are playing with FIRE!

Overview

On October 22, 2009, the Federal Reserve Board issued proposed guidance designed to ensure that incentive compensation practices and policies at Fed-regulated institutions, including U.S. bank holding companies, state member banks and certain other categories of institutions, do not undermine the safety and soundness of those institutions. The Fed explained its action in part by noting that corporate governance structures related to compensation practices may not be sufficient to protect the safety and soundness of institutions, since the federal “safety net” may lead shareholders to tolerate a degree of risk that is inconsistent with safety and soundness. Like the Treasury rules applicable to institutions participating in the Troubled Asset Relief Program (TARP) and recent proposed rules from the Securities and Exchange Commission (SEC), the proposed Fed guidance focuses on identifying and eliminating compensation practices that may encourage employees to take excessive risks. The Fed guidance does not impose pay caps or limit the forms of compensation, but rather imposes a framework of key principles within which Boards and management must design incentive compensation programs. In addition to the guidance, the Fed also announced two new supervisory initiatives to drive progress toward compensation practices that are better aligned with safety and soundness and to identify and spread best practices.

The proposed guidance is subject to a 30-day comment period, with final guidance potentially several months away. However, the Fed expects institutions covered by the guidance to immediately begin reviewing their incentive compensation policies and practices in light of the proposed guidance. In this regard, although the TARP rules and the Fed guidance are not entirely duplicative, there are substantial areas of overlap and institutions that have participated in TARP and are undertaking required risk assessments under the TARP rules should be able to leverage some of that work for purposes of beginning to implement the Fed guidance. In addition, although many banking institutions are not technically subject to the Fed guidance (e.g., state-chartered non-member banks whose federal regulator is the FDIC), we believe all banking organizations should become familiar with and prepare to implement the key tenets of the guidance in anticipation that their regulators will soon require similar measures. Further to this point, the Corporate and Financial Institution Compensation Fairness Act of 2009, recently passed by the House of Representatives, would require all federal banking regulators to regulate compensation with a focus on avoiding excessive risk.

Proposed Guidance

Key Principles

The guidance introduces three key principles designed to ensure that incentive compensation does not encourage employees to take excessive risks.

1. Incentives in compensation arrangements should be appropriately balanced with related risks. The guidance requires institutions to consider the full range of risks inherent in incentive compensation arrangements, including remote but potentially catastrophic risks, to ensure that the potential financial rewards from an employee's activities are appropriately balanced against the related risks. Examples of appropriate balance include (a) adjusting payouts for related risk, (b) aligning the risk horizon with the payout through deferred payments, clawbacks and/or longer performance periods, and (c) reducing the sensitivity of payouts to increases in short-term financial results. As a means of testing whether arrangements are appropriately balanced, the Fed encourages institutions, particularly large, complex institutions where incentive compensation is a major portion of total compensation, to employ both a backward-looking analysis of payments relative to risk outcomes, and a forward-looking “scenario analysis” to assess potential payments and risk outcomes under various scenarios. The Fed also suggests that safety and soundness concerns are lessened where, as is often the case at regional and community banks, incentive compensation comprises a relatively small portion of total compensation, since employees are less likely to take excessive risk when the corresponding payout is less significant.
2. Incentive compensation arrangements should be compatible with effective controls and risk management. The guidance requires institutions to develop and maintain appropriate controls around the design, implementation and monitoring of incentive compensation programs. Those controls should be subject to internal audit and designed by appropriate personnel (e.g., risk management, human resources, finance) whose incentive compensation should be tied primarily to the objectives of their work and not the financial performance of the institution or the business unit they review.
3. Programs should operate within a framework of strong corporate governance, including active Board oversight. The guidance encourages each institution's Board to exercise active oversight through a compensation committee of independent directors, which should work closely with the risk and audit committees (or the full Board if those functions are not delegated to a committee). The Fed expects at least an annual review of management's assessment of the effectiveness of the programs and related controls in providing balanced risk-taking incentives.

Covered Employees; Broad Scope

The preamble to the guidance states that problematic incentive compensation practices at all levels of financial institutions contributed to the financial crisis. Accordingly, the guidance applies not just to senior executives or other most highly-compensated employees, but also to employees who, either individually or as a group, may expose the institution to material risk. However, the guidance also acknowledges that the scope and complexity of each institution's business as well as the scope and prevalence of incentive compensation arrangements will be important factors in evaluating whether incentive compensation arrangements raise safety and soundness concerns. For example, it should be much simpler for community banks whose incentive compensation programs are neither rich nor weighted toward risky activities to implement and satisfy the Fed guidance than for large, diversified, global investment banks with thousands of employees deriving the majority of their compensation from incentive compensation tied to risky activities.

Supervisory Initiatives

The Fed is commencing two supervisory initiatives to promote better incentive compensation practices.

1. Large Complex Institutions. The first initiative involves a “horizontal” review of the incentive compensation arrangements at 28 large, complex banking organizations, designed to (a) better understand the arrangements, (b) assess the effectiveness of controls and whether payouts are balanced with related risks, (c) better understand the corporate governance framework around incentive compensation and (d) identify emerging best practices. Each institution will be required to submit a report detailing its practices and outlining its plans to enhance the effectiveness of controls and ensure their programs are consistent with safety and soundness and do not encourage excessive risk-taking.
2. Other Institutions. Incentive compensation programs and controls at other institutions will be reviewed as part of the regular, risk-focused supervisory process. These reviews will be tailored appropriately to reflect the scope and complexity of the institution's business and compensation programs. Findings will be incorporated into supervisory ratings and, where deficiencies exist, may result in supervisory action against the institution.

What Should Banks Do Now?

En Route Again

As I head down to San Francisco for yet another meeting with a federal banking regulator on behalf of a client, I ask myself, “What is happening in this crazy world of banking?” The past year has been littered with historical and severe financial crisis. Now we are facing the ravages that ensue – as bank after bank in the West suffers the consequences.

The New World of Bank Examinations

Our first hand experience is that bank examinations are now a frightening experience. Examiners, by and large, seem to come in loaded for bear looking under every rock, fearful of missing anything for which they could later be criticized. The ALLL calculation has become a nightmare, subject to arbitrary evaluation. Let's face it, as long as real estate values plummet and appraisers are afraid of their own shadows, collateral values will diminish and write downs will be mandated by examiners and accountants. With “1” rated banks becoming “3s” and “2s” becoming “4s”, a “3” CAMELS rating is now the new “1.” There rarely is a benefit of the doubt given to the banks. At the root of this evil are the FDIC's “Inspector General” reports which are mandated for all losses to the insurance fund of $25 million or more. Hindsight, using a telescope is 20/20!

The Enforcement Action Explosion

Enforcement Actions are being handed out like Advil. With 50% of the banks in the Northwest rated “3” or worse, MOUs and C&Ds are more common than not. While the regulators have a job to do, the language is often inflammatory and provisions dogmatic and unachievable. If the goal is to rehabilitate the banks, these actions are more like prison sentences. There is a lot of closing the barn doors after the horses have stampeded going on out there.

The Failures

It makes me sick to see banks we know or have worked with in some capacity fail. Without being cynical or paranoid, it seems when a bank gets in serious trouble, the regulators target them for euthanasia. Supporting the conspiracy theory that the FDIC would like to shrink the banking universe is their recent pronouncement extending the three year “lockdown” on new banks to seven years, virtually shutting down any new bank formations for the foreseeable future.

Thank Goodness for Capital

The only real ray of sunshine lately has been the ability of non-C&D banks to raise capital. With bank stock prices at decade low values, investors have shown a willingness to put new capital in selected banks that are seen as survivors and consolidators. This is critical to “refuel the tank.” However, the C&D banks have found the sledding far tougher. How long this capital window will remain open is a big unknown, but now clearly is the time to try to raise capital.

The FDIC Insurance Fund

As I predicted in prior CyberGrahams, the fund is now basically bust. Who would ever have thought of 3-year prepaid insurance or of “Reverse Tarp” with the FDIC actually borrowing from the very big banks Treasury just bailed out. It's beyond insanity. Further, the FDIC is finding fewer qualified bidders for failed banks and a sharply diminished appetite for failed bank acquisitions – not a good formula going forward.

Does Anyone Have Any Solutions?

Well, apparently restructuring banking regulation is going to solve a (hopefully) once in a lifetime financial crisis, fueled by easy credit and inflated real estate values. I don't think so. Let's face it, we are in triage now and the patients are falling fast and furiously. I have two simple suggestions: OTTI treatment for real estate collateral and OREO where the appraised value is at a “fire sale” level and the bank has the capacity to hold for a period of time and tolerance for good management teams that are proactively addressing their problems. This situation will be exacerbated as more banks fail and the FDIC as liquidator aggressively disposes of real estate acquired through these bank failures. Eventually, the real estate market and values will bottom out – and I think we are far closer to the end of the down cycle than the beginning. The banks just need some time to allow the cycle to turn. It's that simple! The FDIC can't afford to take down all the banks. Sanity must prevail at last.

The hotel industry is seeing an increased interest among hotel companies to provide hotel asset management services. What are the pressures that are driving this trend? What are the best practices for securing asset management engagements?

The Old Formulas for Success

In the heyday of easy money and brand consolidation, many qualified, experienced hoteliers opened new ownership and management shops. These new companies, often formed with just a few individuals, typically followed one of two different approaches for success.

In the first of these approaches, the hoteliers connected with one or more equity funds and formed joint ventures. The hoteliers brought to the table their experience as operators, including their industry connections and deal sources; the equity funds brought their experience in property acquisition and, of course, their equity. These “owner-operator” joint ventures used and repeated a simple template: the operator finds a hotel that can be repositioned through application of the operator's skills; the joint venture buys the hotel, using the fund's equity and leveraging it with debt financing; and the joint venture executes the repositioning plan, stabilizes the hotel, and sells it for a profit. Typically, these owner-operators had 10 to 20 hotels in their portfolios in various stages of the process, and they provided their equity owners a 12-20% IRR. The operators, as the “finders,” would usually also receive a “promote”. a special equity interest that could give the operator an extra return after certain success thresholds were met.

In the second approach, the hoteliers formed companies that focused exclusively on building a portfolio of management contracts. These “independent management” companies usually focused on a particular segment in which they could demonstrate special skill. By so doing, they presented owners with cost-effective and friendly alternatives to the big, branded management companies.

The Formulas Hit the Wall

Over the past year, several factors have challenged both of these formulas.

The most obvious challenge is the lack of debt financing for acquisition and development. Without credit, most owner-operators have limited ability to purchase, renovate and sell for a profit. Although some lenders are still making hotel loans, interest rates are high and recourse is often required. Additionally, the lenders are demanding much greater equity participation by the owner-operator. Now, the joint venture must put up equity of 40-60% of the hotel's value (rather than 15-30% in the heyday). Additionally, the operator's “sliver” is often expected to be as much as 20-30% of that total equity (rather than .05-5.0% in the heyday). This has temporarily blocked many owner-operators from acquiring hotels. Even the largest hotel companies are hesitant to invest these high levels of equity.

The lack of debt financing has impacted the independent management formula, as well. These companies depend on new development and sales of existing hotels, both of which create opportunities for new management contracts and relationships. Without financing, the fuel for this formula has been running dry.

A second challenge, of course, is the decline in RevPAR across the industry. Under both formulas, the operators' fees are directly tied to hotel performance, and so fee income has declined sharply. This decline has hurt the operators' ability to make the investments of time and money needed to find opportunities and expand market share. Additionally, the decline in performance has severely hurt the equity funds' income and balance sheets, particularly those that have relied on higher levels of leverage. Many no longer have the appetite. or even the ability. to fund new acquisitions.

A third challenge is the so-called “bid/ask” spread that separates buyers and sellers. With the evaporation of debt financing, the decline in RevPAR, and the increase in cap rates, hotel values have plummeted in the minds of buyers. Many owners, though, are in denial. Those that aren't certainly do not find the present time to be an appealing selling opportunity.

Industry observers have predicted that lenders would break the bid/ask stalemate by putting pressure on hotel owners as renewal dates approach and covenant or monetary defaults loom. So far, this prediction has not come to pass. Instead, the lenders appear to be in a surprising mode. we call it “extend, amend, and pretend.”

With the bid/ask spread at an all-time high, the deal flow levels are at an all-time low. The opportunities for hotel companies have been correspondingly scant.

What's a Hotel Company To Do. Buy Debt?

Most hotel companies have been revisiting their business plans and looking for ways to productively engage their underutilized management talent, shore up their income, and expand if possible. See Hotel Times “Three Point Plan to Thrive in 2009” December 2008.

Some owner-operators have felt that a key opportunity is to seek out and buy hotel paper. This opportunity assumes, of course, that the operator's equity partner has funds to invest or that the operator has found a new equity partner in a position to do so. Even so, the number of opportunities to buy hotel paper at deep discounts has been relatively few, as lenders continue to extend, amend and pretend. Anecdotal information suggests that discounts on hotel paper have mostly been less than 20%. At 20%, the discount has not been large enough to justify the additional risks inherent in buying paper. Not all hotel owners will give up their equity without a fight. Some will start lender liability suits or file for bankruptcy protection. Once in bankruptcy, the debt holder's position may be challenged, and the holder may confront unpleasant results. See Hotel Owners, Lenders and Stakeholders Square Off: Equitable Subordination May 2009. Thus the “hotel paper opportunity” has not been a panacea for owner-operators.

Still, the lenders' current frame of mind is unlikely to continue indefinitely. Few believe that RevPAR will increase substantially in 2010. 2011 looks better, but any RevPAR uptick in 2011 will be coming off a very low floor. As this reality takes hold, lenders will have to revalue their hotel loans. When they do, they will have to take their losses. Then, the motivation to extend, amend and pretend should evaporate and action should follow. At that time, perhaps, good opportunities to buy hotel paper may arise.

Asset Management for Lenders and Special Service Providers. A New Marketplace

Many believe that, as in the past, most lenders whose borrowers have defaulted will follow a more traditional route than marketing their paper. they will foreclose, stabilize, and sell their troubled hotel assets. If so, then these lenders will need help. See Hotel Loans in Trouble – Pointers for Lenders.

The Lenders' extend, amend and pretend approach has made it difficult for hotel companies to find lenders who want to engage the help they need. But, as indicated earlier, the lenders' approach is unlikely to continue indefinitely. Most hotel companies believe that, soon, lenders and special service providers will take action and will need help. asset management help.

Additionally, hotel companies are aware that the financing fads of the last five years have multiplied the number of stakeholders in the debt and capital stacks. Even as senior lenders extend, amend and pretend, junior stakeholders might (and should) be less patient. These subordinate parties have seen their interests erode more quickly and substantially than the senior lenders. They are likely to need their own asset managers. perhaps sooner than senior lenders will. to help them make wise choices and protect their investments. The multiplication of layers in the debt and capital stack should correspondingly multiply the needs and opportunities for asset management.

Accordingly, hotel companies are seeking to position themselves to serve these needs and profitably apply their underutilized resources and talent. This rush by hotel companies to re-identify and re-brand as asset management service providers is creating a new competitive market. The competition feels even more acute since there appear to be many hotel companies in the hunt, but the customers are still in hibernation.

Our sense is that hotel companies interested in expanding into this new, still-unfolding market do not yet feel they are on secure footing. Many do not yet know how to best approach lenders and have not really honed their value propositions. This uncertainty is creating confusion for lenders as they are barraged with solicitations. Within the hotel industry, we recognize names and can appreciate the special talents of these people and companies. However, what makes sense to us, as hotel industry insiders, may just be noise to an overwhelmed special service provider or loan credit specialist.

Suggestions for Success

The following are observations that we believe will be helpful in becoming a player in the emerging asset management market and will help your hotel company stand out.

   1. Find and exploit your sweet spot. Identify what it is that you do especially well. If your experience is unique, then initially build your marketing around this obvious point of distinction.

      For example, if you have owned and operated luxury resorts in the Caribbean, then you should target your marketing to lenders who have financed luxury resorts in that region. A lender holding paper on a distressed luxury Caribbean resort will want to give you fair consideration, based on your very targeted knowledge of that asset or asset class. If you were once with the brand, or even had direct experience operating the particular asset, you have a clear marketing advantage, as you will be able to immediately demonstrate where you can provide real value.

   2. Do not over sell. This seems like the same point as the previous one, but it really is different. There is a danger in trying to hold oneself out to be all things to all people. It dilutes your credibility and it undermines the value of your marketing efforts. No one wants to appear desperate. Even if you can asset manage an extended stay hotel and a luxury resort, you lose credibility by marketing for both. If you have no experience in a unique market such as Las Vegas or Hawaii, do not claim to be able to asset manage hotels there. Be honest about where your expertise is and capitalize on that segment. It makes little sense to over promise and under perform. Once you are engaged and have a relationship, then you can market internally to your client that you can cover other asset classes or have other unique capabilities of value. If you are not the right company, then recommend the company you feel is best for the job. In making the referral, you will gain credibility with the lender and are more likely to be trusted and hired by that lender for an engagement that is in your sweet spot. The party receiving the referral should reciprocate.

   3. Leverage your network. Many of you have existing relationships with equity funds and lenders. Let these companies know of your expanded services through the people you are working with. Speak with lawyers and accountants who work within the hotel industry. Lawyers and accountants are expected to provide independent and trustworthy recommendations. If the lawyers and accountants have a good knowledge of your sweet spot, then they can be confident that you will perform well.

   4. Target the right companies. The largest lenders and special service providers have strong barriers to entry. If you do not already have a relationship with a major lender or special service provider, then you have an uphill battle for acceptance. On the other hand regional and local lenders do not have the same institutional relationships and are more likely to engage a new asset management company. Local and regional lenders generally have smaller hotels in their loan portfolios, therefore, the engagements may not be as large or prestigious as with a national lender or special service provider, but there is money to be made while a reputation is developed.

   5. Team up. Be willing to create new alliances with similarly situated companies and with other service firms that might offer unique services. For example, if you do not have construction expertise, then you might consider teaming up with a group that is currently providing construction consulting to your targeted client. Then leverage the existing relationship and share the upside with your new partners. Although law firms, due to ethics rules, may not share fees with you, having a relationship with hospitality specialty counsel can help with your marketing. In this ever changing environment, it will help to demonstrate to potential clients that you have the wherewithal to anticipate needs and services outside of your specialty and have developed relationships with the best providers in the other fields.

   6. Educate the lending and investment community. These new customers need to be convinced that hiring an asset manager is a good investment of time and resources. Individually and collectively, at every opportunity, the lender and investor need to be advised why it is important to have an asset manager representing their piece in the asset. Many lenders and special service providers believe having an asset manager is redundant to their function. It is important that they understand the nuances of branding, market share, deferred capex and many other hotel-specific challenges that can quickly sink their asset and with it their equity.

With over fifty percent (50%) of all hotels anticipated to change hands over the next several years, there will be plenty of work for everyone. The burgeoning asset management community should look to maintain its high standards and credibility by providing the most effective service they can. Then, new and valuable business relationships will develop, the industry's reputation will be enhanced, and the lending community will gain a respect for the industry that will lead to even more opportunities.

Four months ago, the “Employee Free Choice Act”. which would have helped union organizers by eliminating secret ballot elections in favor of accepting signed union cards, increased penalties for employers for misconduct in union organizing campaigns, and provided for arbitrator-dictated terms of an employer's first union contract if bargaining failed. fell short of the votes required to break a filibuster in the U.S. Senate. In Olympia, the “Worker Privacy Act”. which would have limited the ability of employers to tell their side of the unionizing issue. was killed after inappropriate lobbying by organized labor was uncovered by the Seattle Times. See Graham & Dunn Cyber-Graham, March 26, 2009.

In the news this past week are developments on both fronts.

To overcome objections to the effective elimination of secret ballot elections, Democrats in D.C.. in collaboration with organized labor. have reportedly decided to drop the card-check provision in order to capture enough votes to defeat a filibuster. A revised bill is in the works. The bill would drop card-check . . . but would still contain enhanced penalties for employers accused of wrongdoing in opposing union organizing campaigns, and provide for the imposition by a government arbitrator of the terms of a collective bargaining agreement, if an agreement is not promptly reached between the parties. Critics of the proposed legislation, on the management-side of the aisle, argue that the prospect of a government-imposed contract will inflate union demands at the bargaining table, and be a big boost in union organizing to begin with, because a union would then be in a position to promise not just the right to negotiate, but that a contract will actually be obtained (and on terms not dictated by an employer's bargaining leverage).

In Olympia, reports the P-I Online on Monday, July 13, the State Labor Council is turning up the heat on Democrats in state government, again threatening to cut off campaign financing for politicians who oppose passage of legislation supported by organized labor, specifically, the Workers Privacy Act. A key provision in that legislation would prevent employers from making “captive audience speeches”. holding discussions on company time about the pros-and-cons of unions.

A revised federal Employee Free Choice Act is not in final form, but its drafters are reported to be considering giving union organizers access to company property for campaigning, and, like the Washington State labor bill, barring employers from requiring employees to attend “captive audience” meetings.

1. Broker Voting in Director Elections. The SEC approved the New York Stock Exchange's proposed change to Rule 452 to re-classify director elections as “non-routine” matters and thereby prohibit brokers from voting shares for which they receive no voting instructions from the beneficial holder. This rule change impacts all public companies, not just NYSE-listed companies, because the rule applies to all NYSE member brokers; the exchange on which a particular company's stock is listed is irrelevant for purposes of applying the rule. Historically brokers have typically voted uninstructed shares according to the board's recommendations. More recently, some brokers have adopted a “proportional voting” model, under which they vote uninstructed shares in the same proportion as shares for which they receive instructions, which usually results in a strong majority of “retail” shareholder votes in line with the board's recommendations. The net effect of this rule change will be the loss of previously reliable block of voting support generally corresponding to the size of the company's retail shareholder base (since retail voting tends to be very low). Companies with a large retail shareholder base need to consider whether quorums will be threatened (which typically will not be an issue if a “routine” matter under Rule 452, such as ratification of auditors, is included on the ballot), and if they have a majority voting standard for director elections, whether the loss of broker votes may place directors at risk. The revised rule is effective for shareholder meetings occurring on or after January 1, 2010.
2. New Disclosure Rules. The SEC voted to propose new or revised disclosure rules in the following areas:
• Risk Analysis of General Employee Compensation Programs. If the risks arising from the incentives driven by general employee compensation policies and programs could have a material effect on the company, the Compensation Discussion & Analysis (CD&A) would need to discuss and analyze those programs on a company-wide basis (i.e., not limited just to the named executive officers).
• Compensation Consultant Conflicts of Interest. If the board or compensation committee retains a compensation consultant that also provides other services to the company, the company would need to disclose the fees for the board/compensation committee advice, the other services and related fees, management's role in retaining the consultant for other services and whether the board or compensation committee approved the other services.
• Equity Compensation Reporting. Equity compensation awards now would be reported in the Summary Compensation Table and the Director Compensation Table as the aggregate grant date fair value of awards granted during the fiscal year, as opposed to the amount expensed during the fiscal year for all outstanding awards.
• Board Leadership Structure. Companies would be required to discuss in their proxy statements the reasons for their particular board leadership structure (i.e., insider Chair separate from CEO, Chair/CEO combination, independent Chair), why that structure is appropriate for the company, and any impact of the board leadership structure on the board's risk management function.
• Director Qualifications. Director and nominee biographies in proxy statements would need to include disclosure of the experience, qualifications, attributes and skills that qualify the director or nominee to serve on the board and the committee(s) on which they serve. Biographies also would need to disclose all public company directorships held during the last five years, as opposed to only current directorships as is presently required.
• Form 8-K Reporting of Shareholder Meeting Results. Companies would be required to report voting results from shareholder meetings within four business days under a new Item of Form 8-K. Currently, voting results are not required to be reported until the Form 10-Q for the quarter during which the meeting occurred.
3. Proxy Solicitation Rule Changes. The SEC proposed amendments that would allow shareholders and other third parties to distribute unmarked copies of the company's proxy card, along with their own views, without having to file their own proxy statements. This would allow, for example, dissidents to send proxy cards with “vote no” literature.
4. Say on Pay for TARP Companies. The SEC proposed rules to require public companies that are TARP participants to include in their annual proxy materials a separate non-binding proposal to approve executive compensation, and disclose what effect the vote will have. This rule proposal was required by the stimulus bill and does not materially change public TARP companies' obligations in this area, which were already effective for the 2009 proxy season. Notably, the SEC clarified a point of ambiguity in the original legislation: that “smaller reporting companies”, which are not required to include a CD&A in their proxies, do not need to include one merely to satisfy the statutory language that the advisory vote be on executive compensation as disclosed in the proxy statement, including the CD&A (among other disclosures).

Treasury Actions

The Treasury Department issued “interim final” rules on executive compensation and corporate governance for TARP companies, which are immediately effective but also subject to public comment for 60 days and possible revision. The interim final rules clarified and expanded upon some provisions of the February 2009 stimulus bill, left other provisions vague and ambiguous and used the authority delegated to Treasury to impose some new requirements not contemplated by the original legislation. Some of the more notable provisions of the rules are:

• Golden Parachute Payment Restrictions. These restrictions cover the “senior executive officers” (the CEO, CFO and next three most highly compensated executives) (SEO's) and the next five most highly compensated employees (HCE's). Severance in any amount is prohibited for this group, as are any payments triggered by a change in control. In addition, there can be no acceleration of any vesting (such as under outstanding stock or option awards, or supplemental retirement benefits) as a result of termination or change in control.
• Bonus, Incentive and Retention Payment Restrictions. TARP companies may not accrue or pay any bonus, incentive or retention payment to a group of employees that depends on the amount of government investment. The rules provide an exception for restricted stock that cannot vest sooner than two years and otherwise becomes transferable in 25% increments as a like percentage of government investment is repaid. Another exception applies for grandfathered arrangements that existed on February 11, 2009 and provide a legally binding right to a specific payment. The definitions of bonus, incentive and retention awards are broad; for example, a supplemental retirement benefit subject to vesting can be considered a retention award.
• Gross-Ups. Tax gross-ups are prohibited for the SEO's and the next 20 HCE's. Like the restriction on golden parachute payments, there is no carve-out for pre-existing arrangements.
• Perquisites. Companies must not only disclose but also justify perquisites with a value over $25,000 provided to anyone covered by the bonus restriction.
• Clawback and Luxury Expenditures Policies. TARP companies must ensure that all incentive compensation to the SEO's and the next 20 HCE's is subject to clawback if the underlying performance metrics were inaccurate. TARP companies also must adopt a luxury expenditures policy covering expenditures for entertainment and events, transportation services, office renovations and other similar matters.
• Say on Pay for Non-Public Companies. It still remains unclear whether non-public TARP companies are required to include a Say on Pay proposal in their proxy statements. The original legislation, SEC rules and Treasury rules all tie the advisory vote to executive compensation disclosure provided under SEC rules. It seems reasonable for non-public TARP companies, which are not required to provide any executive compensation disclosure under SEC rules, to conclude that a Say on Pay vote is not required because it would be meaningless in the absence of anything to vote on, and that a requirement for Say on Pay tied to SEC disclosure does not bootstrap them into having to provide SEC-like executive compensation disclosure. This latter position is supported by analogy to the SEC's clarification that smaller reporting companies do not need to prepare a CD&A merely because the Say on Pay requirement references CD&A among other disclosures. This issue will need to be clarified.
• Special Master for Executive Compensation. Treasury has created the Office of the Special Master for TARP Executive Compensation. The Special Master is charged with carrying out Treasury's obligation to review prior compensatory payments by TARP companies to determine whether they were inconsistent with the purposes of TARP or contrary to the public interest. The Special Master also has authority to issue interpretive opinions on executive compensation, either upon the request of a TARP company or on his own volition.

Graham & Dunn Franchise Attorneys Douglas C. Berry, David M. Byers, and Daniel J. Oates authored the following article, published in Summer 2009 in the Seattle University Law Review, Vol. 32, Pg. 811.  Cited as Berry, Byers & Oates, State Regulation of Franchising; the Washington Experience Revisited, 32 Seattle U. L. Rev. 811 (2009).  Posted with permission.

View Article as .pdf

On June 12, 2009, Facebook, the online social networking site, began allowing its millions of users to create personalized URLs for their Facebook pages. These personalized "usernames" may incorporate trademarks that are already in use.

Allowing your trademark to be used as a Facebook username could dilute the value of the mark and your ability to protect it.  Facebook has recognized this, and is providing a method by which trademark owners can call their registered trademarks to Facebook's attention. While it is not yet clear how Facebook decides which trademarks are to be entitled to protection, the aim of the program is for qualifying trademarks to be protected from being registered as usernames by Facebook users.  Facebook also has a mechanism whereby a trademark owner who mark does get registered as a Facebook username can request that Facebook take corrective action.

Click here to view the Facebook trademark registration form.

For more information on protecting your trademark, contact one of our trademark attorneys: Robert Cumbow (rcumbow@grahamdunn.com); Kathleen Petrich (kpetrich@grahamdunn.com); and Michael Atkins (matkins@grahamdunn.com).

The hotel industry's year-over-year declines continued in the second quarter of 2009. Demand is leveling out at a lower baseline, and the hotel industry is adjusting to a new reality.

Hotel owners, lenders and stakeholders are now beginning to square off to determine who will take a haircut and who will be squeezed out altogether. This process will not be quick or easy. As this process lurches through its early stages, an issue has temporarily taken center stage: equitable subordination.

Earlier this month, In In re Yellowstone Mountain Club, the bankruptcy court subordinated Credit Suisse's $375 million secured loan. How did this happen? Will it happen again in other cases? What are the lessons?

The Yellowstone Mountain Club LLC

The Yellowstone Club development began in late 1999, touted as the world's only private ski and golf community. In 2005, Credit Suisse made a secured loan of $375 million to the then-owner of the development, Yellowstone Mountain Club, LLC (the “Debtor”). Credit Suisse made the loan under a “new loan product” referred to as a “syndicated term loan.” A Credit Suisse loan officer described it as akin to a “home-equity loan” for commercial real estate owners.

Last November the Debtor filed a Chapter 11 bankruptcy. The unsecured creditors committee and others faced off against Credit Suisse, attacking its secured claim on a number of grounds. Then, after motions and hearings, the bankruptcy court on May 13 entered an interim order subordinating Credit Suisse's $375 million loan to the claims of unsecured creditors. In other words, the unsecured creditors and post-petition lenders will be paid ahead of Credit Suisse, even though Credit Suisse has a first lien mortgage on the development.

A New Loan Product Built on Shaky Ground

Credit Suisse's “new loan product” did work much like a home equity loan. it allowed development owners to take equity out of their developments and use the proceeds freely for other purposes. As the Yellowstone bankruptcy court described it:

“[The product allowed] owners of luxury second-home developments the opportunity to take their profits up front by mortgaging their development projects to the hilt. Credit Suisse would loan the money on a non-recourse basis, earn a substantial fee, and sell most of the credit to loan participants. The development owners would take most of the money out as a profit dividend, leaving their developments saddled with enormous debt. Credit Suisse and the development owners would benefit, while their developments. and especially the creditors of their developments. bore all the risk of loss.”

The court believed that, like some securitized home equity loans in recent years, the Credit Suisse product was based on inflated and manipulated property valuations. The court noted that Credit Suisse, to support the product, had developed “a new form of appraisal methodology,” termed “Total Net Value” methodology. This new methodology “relied almost exclusively on the Debtors' future financial projections, even though such projections bore no relation to the Debtors' historical or present reality.” The court stated that the methodology did not comply with FIRREA, and then pointedly remarked that this fact “was not important to Credit Suisse because Credit Suisse was seeking to sell its syndicated loans ‘to non bank institutions'.” The court concluded that the product “enriched Credit Suisse, its employees and more than one luxury development owner, but it left the developments too thinly capitalized to survive…. [T]hey were doomed to failure once they received their loans from Credit Suisse.”

“Let the Chips Fall Where They May”

The Yellowstone court found that the Credit Suisse product had this same “dooming” effect on the Yellowstone Club development. Of the $375 million loan proceeds, “approximately $209 million was transferred out of the Yellowstone Club” to the Debtor's primary equity owner. The court obviously believed that Credit Suisse callously disregarded that the loan and the expected disbursements would leave the project without sufficient capital to survive. Credit Suisse “had not a single care how [the developer] used a majority of the loan proceeds.” It turned “a blind eye to Debtors' financial statements,” and its due diligence was “all but non-existent.” The only plausible explanation for Credit Suisse's actions, the court said, was that it “was simply driven by the fees it was extracting from the loans it was selling, and letting the chips fall where they may.”

Building to a crescendo, the court concluded:

“Unfortunately for Credit Suisse, those chips fell in this Court with respect to the Yellowstone Club loan. The naked greed in this case combined with Credit Suisse's complete disregard for the Debtors or any other person or entity who was subordinated to Credit Suisse's first lien position, shocks the conscience of this Court. While Credit Suisse's new loan product resulted in enormous fees to Credit Suisse in 2005, it resulted in financial ruin for several residential resort communities. Credit Suisse lined its pockets on the backs of the unsecured creditors. The only equitable remedy to compensate for Credit Suisse's overreaching and predatory lending practices in this instance is to subordinate Credit Suisse's first lien position to that of CrossHarbor's superpriority debtor-in-possession financing and to subordinate such lien to that of the allowed claims of unsecured creditors.”

Why “Equitable Subordination?”

Section 510(c) of the Bankruptcy Code states:

[T]he court may - (1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim… ; or (2) order that any lien securing such a subordinated claim be transferred to the estate.

The subordination of a claim based on equitable considerations generally requires three findings: “(1) that the claimant engaged in some type of inequitable conduct, (2) that the misconduct injured creditors or conferred unfair advantage on the claimant, and (3) that subordination would not be inconsistent with the Bankruptcy Code.” Benjamin v. Diamond (In re Mobile Steel Co.) 563 F.2d 692, 699-700 (5th Cir. 1977).

Although the general theory of equitable subordination appears to have a broad reach, its use has been rare and reserved for extraordinary circumstances. Normally, before a non-insider claim is subordinated, “egregious conduct” must be “proven with particularity.” Sharp dealings aren't enough. one must prove that the claimant “is guilty of gross misconduct tantamount to fraud, overreaching or spoliation to the detriment of others.” In re First Alliance Mortg. Co., 497 F.3d 977, 1006 (9th Cir. 2006).

The Yellowstone court obviously felt that Credit Suisse's conduct was egregious enough, finding that its actions “were so far overreaching and self-serving that they shocked the conscience of the Court.” What was so egregious? Boiling down the facts, Credit Suisse in essence: 1) made a loan knowing that a large part of the money would be taken out of the project and used elsewhere; 2) planned to syndicate the loan to others; 3) was motivated to ignore red flags because of the large fees it would earn; 4) based its loan on a questionable appraisal methodology; and 5) over-leveraged the project.

Will “Equitable Subordination” Happen in other Cases?

The Yellowstone court freely pointed out that Credit Suisse's “new loan program” has been marketed to other master-planned residential and recreational communities, “such as Tamarack Resort, Promontory, Ginn, Turtle Bay, and Lake Las Vegas.” Like the loan to the Yellowstone Club, each of those other developments “received a syndicated loan from Credit Suisse's Cayman Island branch, which allowed the equity holders in said entities to take sizeable distributions from all or part of the Credit Suisse loan proceeds.”

Those other well-known projects are obviously outside of the Yellowstone court's jurisdiction. The court, however, essentially invited stakeholders in those other developments to make similar attacks on the loans Credit Suisse made to those projects:

“Numerous entities that received Credit Suisse's syndicated loan product have failed financially, including Tamarack Resort, Promontory, Lake Las Vegas, Turtle Bay and Ginn. If the foregoing developments were anything like this case, they were doomed to failure once they received their loans from Credit Suisse.”

Clearly, whenever Credit Suisse's “new loan product” was involved in a project, stakeholders will now be able to attack the loan on the basis of equitable subordination.

But the argument likely will reach loans from other lenders. In the real estate bubble of recent years, many loans have the earmarks that “shocked the conscience” of the Yellowstone court. Under the court's holding, a loan will be susceptible to attack if it has the following attributes:

• It allowed the equity owner to take money out of the project;
• It was intended to be securitized;
• It allowed the lender to earn large fees;
• It was based on potentially questionable appraisals or appraisal methods; and
• It overleveraged the project.

These circumstances have a familiar ring to many in the hotel industry. The last two bullets might seem somewhat unique to the Yellowstone facts. Most loans in recent years likely were not based on Credit Suisse's “Total Net Value” methodology. But given the demand and value declines of the last nine months, 20-20 hindsight can make many appraisals look questionable. And at today's values, many. if not most. development projects look overleveraged.

What are the Lessons?

The industry will learn much as it works through the current extraordinary circumstances. The Yellowstone case can provide many lessons, some broad and philosophical, others practical and technical. A few of the more practical take-aways to consider:

• For principal owners: Did you take money out of your project and overleverage it? If so, investors and creditors may have a basis to recover the funds you received. They may also seek to subordinate the secured loan that served as the source of the distributions. Subordination may trigger certain of your guaranty obligations to the lender.
• For investors: If the principal owners took money out of your project and overleveraged it, you may have a basis to recover the money and subordinate the loans that funded the distributions.
• For lenders: If Credit Suisse's “new loan program” seems at all similar to loans in your portfolio, take into account the possibility of equitable subordination and other attacks. The banking industry is not popular at this time, and judges may be looking for ways to address what is viewed as “predatory lending practices” and other “abuses” that might be blamed for the financial meltdown. Be sensitive to these issues in the foreclosure process, and, if possible, seek ways to obtain a reasonable recovery outside of the free-fire zone of bankruptcy court.
• For buyers: Understand that, if you buy a loan from a lender at a discount, you must look carefully at the circumstances. A first lien mortgage may be susceptible to attack and may present unpleasant surprises.

Meeting the Needs of the Industry

The hotel industry faces daunting challenges in this time of stress. To help clients successfully address them, in January 2009 Graham & Dunn announced the formation of its Hotel Asset Resolution Task Force. See Graham & Dunn Establishes…. HART Force employs Graham & Dunn's nationally recognized Hospitality Industry Group. Its members have assisted the industry since 1990, and, in previous down-cycles, have successfully addressed many of the same legal issues and challenges facing the industry today. HART Force is further enhanced and combined with the extensive banking industry resources of Graham & Dunn's Financial Services Group and the firm's bankruptcy/insolvency, real estate, labor and employment, litigation, and construction practices.

HART Force is led by Hospitality Industry Group partners Irvin W. Sandman and Russell C. Savrann. It provides clients advice about, and access to, the Hospitality Industry Group's wide-ranging contacts and resources in the hotel industry. These resources include advisory, economic, and disposition services and companies that can assist with a broad range of segments and brands, as well as highly-regarded independent hotel management companies.

HART Force members continue to inform the industry with articles on relevant topics. Most recently Mr. Sandman and Mr. Savrann wrote on the special challenges for hotel lenders. See Hotel Loans in Trouble. Pointers for Lenders.

Introduction

As we make our way through and eventually out the other side of the financial crisis, Congress, the SEC, the Treasury Department and other governmental authorities are poised to implement, and expand beyond troubled financial institutions, major pillars of the shareholder activist agenda and new regulations on executive compensation. At the state level, Delaware has enacted, and many other states also can be expected to adopt, significant corporate governance reforms. The remainder of 2009 is likely to bring new rules and legislation with respect to some or all of the following major issues.

• Independent Board Chair. On May 19, 2009, Senators Charles Schumer and Maria Cantwell introduced the “Shareholder Bill of Rights Act of 2009”, which would require all public companies to have an independent Chair of the Board of Directors. On a separate track, SEC Chairman Schapiro has stated that the SEC will consider requiring proxy disclosure of the reasons for a company's particular Board leadership structure (i.e., insider Chair separate from CEO, Chair/CEO combination, independent Chair).
• Majority Voting and Declassified Boards. The proposed Shareholder Bill of Rights Act of 2009 would require public companies to adopt majority voting in uncontested elections, and to place the entire slate of directors up for election each year.
• Proxy Access. “Proxy access” refers to the ability of shareholders to include their own board nominees in the company's proxy statement. On May 20, 2009, the SEC approved the publication of proposed rules implementing proxy access for all public companies. Statements at the SEC's open meeting and the SEC's press release (available here) reveal the following core tenets of the new rule proposal:
  • To be eligible, a shareholder would need to own, for a minimum of one year, an amount of shares that varies depending on the size of the company: 1% for large accelerated filers ($700 million public float or more), 3% for accelerated filers (public float of $75-700 million) and 5% for non-accelerated filers (public float less than $75 million).
  • Shareholders could aggregate ownership to reach the required threshold.
  • Shareholder nominees in the aggregate could represent no more than the greater of one nominee or 25% of the company's board, with preference given to the earliest nomination, not the highest share ownership.
  • Nominees must be independent under applicable stock exchange requirements.
  • Nominating shareholders must file certain information on a new Schedule 14N, and certify that they are not seeking a change in control of the company or to gain more than minority representation on the board.
  
  The proposed rules have not yet been published and will be subject to public comment and revision, and it is important to remember that proxy access has twice been rejected by the SEC in the last decade. However, the recent change in SEC leadership combined with political pressure arising from the financial crisis suggests that proxy access in some form is likely to be implemented in time for the 2010 proxy season.
  
  Momentum behind proxy access is underscored by proposed federal legislation and recent state action. The proposed Shareholder Bill of Rights Act of 2009 directs the SEC to adopt rules establishing proxy access. Delaware enacted amendments to its General Corporation Law in April 2009 permitting the adoption of proxy access through bylaw amendments. Other states, including Washington, are currently studying the issue and are likely to follow Delaware's lead.
• Risk Committee of the Board. The proposed Shareholder Bill of Rights Act of 2009 would require public company boards to create a risk committee of independent directors with responsibility to establish and evaluate the company's risk management practices.
• Say on Pay. The February stimulus bill required all financial institutions participating in the U.S. Treasury's Troubled Asset Relief Program (TARP) to provide shareholders with an annual non-binding vote on executive compensation. The proposed Shareholder Bill of Rights Act of 2009 would extend that requirement to all public companies.
• Other Executive Compensation Issues. Treasury will soon release regulations implementing the executive compensation provisions of the February 2009 stimulus bill. SEC Chairman Schapiro has stated that the SEC is considering a number of changes to executive compensation disclosure rules. In addition, the White House, the Federal Reserve and the SEC reportedly are working on an initiative to broadly regulate compensation at a wide range of financial institutions, both public and private, and without regard to whether an institution has received federal assistance. Here are some of the issues reportedly being addressed.
  • Golden Parachutes. The stimulus bill defined the first dollar as “golden” by prohibiting any severance payments to executives of TARP participants, even several weeks or months of salary according to time-in-service formulas applicable to all employees. The language of the statute was vague, and we can expect the upcoming Treasury regulations to clarify its scope. The proposed Shareholder Bill of Rights Act of 2009 would require merger proxies to include a non-binding shareholder advisory vote for any type of compensation triggered by the underlying transaction.
  • Excessive Risk. TARP participants are already required to take a number of actions aimed at ensuring that compensation programs do not encourage excessive risk-taking. The upcoming Treasury regulations will clarify some of these requirements. The SEC may now require all public companies to disclose their risk management practices, both generally and in the context of setting compensation. The new White House-led initiative to reform compensation practices at financial firms reportedly will include restrictions on pay practices that are deemed to threaten the “safety and soundness” of the institution, such as paying loan officers on volume rather than loan quality. The risk committee that would be required by the proposed Shareholder Bill of Rights Act of 2009 conceivably could have some overlapping jurisdiction (with the compensation committee) over compensation practices.
  • Other Executive Compensation Disclosure. Chairman Schapiro has stated that the SEC will consider requiring proxy disclosure of a company's overall compensation approach, not just the approach for top executives, and disclosure related to compensation consultant conflicts of interest. The SEC reportedly also is considering amending the Summary Compensation Table to include the grant date fair value of awards granted during each year, rather than the aggregate compensation expense recognized for all awards during the year.
• Other State Law Governance Reforms. In addition to the proxy access amendments discussed above, Delaware enacted additional significant corporate law amendments which other states also can be expected to adopt. These other amendments include:
  • Separate Record Date for Voting Rights. Delaware corporations now may (but are not required to) provide for a record date for shareholders entitled to vote that is separate from the record date for shareholders entitled to notice of the meeting. This allows the voting record date to be closer to the meeting date, and thereby addresses concerns that some shareholders can influence the outcome of an election without holding any economic interest in the company.
  • Reimbursement of Proxy Contest Expenses. Delaware corporations now may (but are not required to) provide in their bylaws for the reimbursement of expenses incurred by shareholders in waging successful proxy contests, along with any conditions for reimbursement such as the percentage of the vote received by the shareholder nominee.
  • Director and Officer Indemnification. The Delaware amendments protect indemnification and related expense advancement rights provided under a company's charter documents from being stripped or reduced after an event giving rise to indemnification or expense advancement occurs.

Increasing Influence of Proxy Advisory Firms

A likely consequence of the implementation of some or all of the reforms described above is to increase the influence of proxy advisory firms such as ISS/RiskMetrics. For example, if all public companies are subject to Say on Pay, majority voting and declassified boards, all compensation committees could face increased pressure to conform executive compensation programs to ISS guidelines or risk being targeted for ouster at the next annual meeting. Nominating committee members similarly could face increased pressure with respect to governance issues.

Public Company Action Items

• Independent Board Chair. If they have not done so already, public companies with an executive Chairman should begin contingency planning for an independent Board Chair in case that provision of the proposed Shareholder Bill of Rights Act is enacted. If an independent Chair is not legislated, public companies should anticipate the need for proxy disclosure explaining their choice of Board leadership.
• Proxy Access. Public companies should assess their shareholder base to understand which shareholders, either alone or in combination with other large shareholders, would have a nomination right under the proposed proxy access rules, and whether any of those shareholders opposed incumbent directors in recent elections.
• Review Executive Compensation Programs. Public companies should conduct a fresh review of executive compensation programs and consider whether any may put compensation committee members at risk, particularly those that draw the heaviest criticism such as tax gross-ups, golden parachutes and perquisites.
• Compensation Consultant Conflicts. Public companies with a compensation consultant that serves both the compensation committee and management should anticipate new disclosure requirements regarding potential conflicts of interest.

Action Items for All Companies

• Banks and Other Financial Institutions: Review Compensation Programs. All banks and other financial institutions should review their compensation programs for practices that may be considered to promote excessive risk taking, such as paying loan officers based on volume, in light of the initiative reportedly underway at the White House, Federal Reserve and SEC.
• Consider Various State Law and Public Company Reforms. Many if not most states can be expected to follow Delaware's lead with respect to the governance reforms noted above. Both public and private companies should begin to consider how the reforms enacted in Delaware may affect them if enacted in their state. In addition, private companies that model public company governance structures as a best practice, or in anticipation of a public offering, may wish to implement some or all of the reforms applicable to public companies.

Conclusion

It is unclear whether, and in what form, each of the proposed corporate governance reforms discussed above ultimately may be implemented. However, significant momentum seems to be building toward the adoption of many if not all of them. We will publish further updates on these issues as developments warrant.

In the meantime, please contact your usual Graham & Dunn attorney or Casey M. Nault (206.903.4808 or cnault@grahamdunn.com), Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com), or Bart E. Bartholdt (206.340.9647 or bbartholdt@grahamdunn.com) if you should have any questions or wish to discuss these issues further.

Washington residents may need to review their estate plans because of changes in estate tax laws. The current Washington state estate tax is no longer tied to the federal estate tax system. This unlinking of the tax systems means that estates of Washington residents may face unanticipated tax liabilities.

Many married couples still have Wills that were drafted when the two estate tax systems were integrated. Those Wills were designed so no estate tax would be due upon the death of the first spouse to die, but may now result in the surviving spouse paying up to $170,000 to the State of Washington. The Wills can be modified to delay that tax.

An unmarried person who passes away in 2009 with a taxable estate of $3,500,000 would pay no federal estate tax, but would pay up to $170,000 of State of Washington estate tax. If an individual is able to make lifetime gifts, this tax could be eliminated.

The chart below compares the amounts that can pass free of estate tax under both systems.

Year of Death	State of Washington Statutory Deduction	Federal Applicable Exclusion Amount
Between January 1, 2006 and December 31, 2008	$2,000,000	$2,000,000
2009	$2,000,000	$3,500,000
2010	$2,000,000	REPEAL FOR ONE YEAR ONLY
2011 and thereafter	$2,000,000	$1,000,000

Here are samples of the tax payable by the estate of an unmarried Washington resident who dies in 2009.

Federal Taxable Estate	State of Washington Estate Tax	Federal Estate Tax	Total Estate Tax
$3,500,000	$170,000	0	$170,000
$5,000,000	$390,000	$499,500	$889,500
$10,000,000	$1,255,000	$2,360,250	$3,615,250

Make sure that your estate plan takes into consideration the increases in the amounts that can pass free of estate tax and the coordination required because of the differences in the federal and State of Washington estate tax systems. Graham & Dunn's wealth management attorneys can review your current estate plan to make sure that it is flexible and works to your advantage.

If you have any questions or wish to discuss this issue further, contact Marcia K. Fujimoto at 206.340.9637 or mfujimoto@grahamdunn.com, Wendy S. Goffe at 206.340.9633 or wgoffe@grahamdunn.com or any of the members of Graham & Dunn's Wealth Management Team.

Jeffrey Beaver¹
May 5, 2009 

At one end of the spectrum regarding regulatory takings in the environmental context, regulations are treated as presumptively valid exercises of a government's police powers^.2  At the other end of the spectrum, you find regulations that clearly go “too far”³ and are invalid or amount to a taking.  For those of us practicing in the middle, we are more likely to face an environmental regulation that diminishes the land value but not to the level found in Lucas v. South Carolina Coastal Commission.⁴

From Police Power to Regulatory Takings

So why are some regulations that diminish value not treated as a compensable taking?  The simple answer is that regulations are considered within the scope of the slate's police powers.⁵  Early takings jurisprudence treated police powers as being limited to the regulation of nuisances.⁶  Generally such regulations were pro-active and aimed at preventing undesirable actions.  Since Village of Euclid v. Amber Realty Co.,⁷ the modern view of the state's police power is that the power is a broad regulatory power which encompasses any regulation aimed at the health, safety, and welfare of the state.  At its most extreme, this police power has been argued to be so broad that if the regulation is deemed valid then landowners are not entitled to compensation for their losses.  However, the common interpretation of police powers is that it amounts to the government's general regulatory power-so long as the government exercises this power for valid purposes.

On the other end of the spectrum, certain regulations are treated as a per se taking requiring compensation.  These regulations fall into two categories⁸:

1. Physical appropriation or invasion under Loretto v. Teleprompter Manhattan CATV Corp.⁹;
2. Total regulatory taking under Lucas.

We know that any regulation which requires a permanent and physical occupation of the property is a taking regardless of the actual dollar damage.¹⁰  Even if the regulation increases the value of the property it remains a taking, however, the amount of compensation due may be nominal.¹¹

Under the Lucas total regulatory taking rule, if the regulation denies all economically viable use of the property leaving the property “economically idle,” then the regulation amounts to a taking.¹²  In a 2002 opinion, the Court clarified that the per se rule applies to the parcel-as-a-whole and that the per se rule requires a 100% diminution of value, not 95%.¹³  Further, a regulation must be permanent and not temporary for the Lucas analysis to apply.¹⁴

While it is important to understand the outer limits of the police power and takings, most of our clients will face regulations that fall in the middle: someplace between a clearly valid exercise of the police power and a categorical taking.

Partial Takings: The Middle Ground

For regulations that result in a partial taking, Lingle v. Chevron U.S.A., Inc.¹⁵ affirmed the appropriateness of a Penn Central v. City of New York¹⁶ analysis.  Under Penn Central, courts are to review takings claims based on three well known factors:  (1) the economic impact of the regulation on the claimant; (2) the character of the government regulation; and (3) the regulation's interference with investment-backed expectations.¹⁷  The Penn Central Court rejected the landowner's claim that the landmark status caused a loss of value of air rights by citing that, in the evaluation of a takings claim, the Court will not segment the property but rather will evaluate the extent of the interference on the entire parcel.¹⁸  As for the landowners' claim that they are being forced to bear a public burden, the Court rejected this noting the city's landmark law is applied to several structures throughout the city.¹⁹  The purpose of these factors is similar to the Loretto and Lucas analyses in that the “focus [is] on the severity of the burden that the government imposes upon private property rights.²⁰

Lingle also settles that the “substantially advances a legitimate state interest” test from Agins v. City of Tiburon²¹ is not a valid method of determining whether a taking has occurred.²²  The reason behind disavowing the Agins test is that the courts should evaluate regulatory takings based on the “magnitude or character of the burden a particular regulation imposes upon private property rights.²³  Applying a Penn Central analysis avoids the circumstance where a landowner who is burdened by an effective regulation has not suffered a taking, while a landowner who is also burdened, but by an ineffective regulation, has suffered a taking.²⁴  As the Lingle court notes, it is untenable to decide whether a regulation “takes” by virtue of its ineffectiveness.²⁵

Most cases will be subject to the three-factor Penn Central analysis.  Cases involving a 100% diminution of value will be analyzed under Lucas.  Cases involving a physical invasion will be analyzed under Loretto.

For more information on Regulatory Takings or Litigation contact Jeffrey A. Beaver at jbeaver@grahamdunn.com or 206.340.9652.  This article is available for download as a .pdf.

Notes:

1. Jeffrey Beaver is a shareholder at Graham & Dunn PC in Seattle, Washington.  This article is adapted from remarks Mr. Beaver delivered in August 2007 at the ABA Annual Meeting in San Francisco.
2. See Village of Euclid v. Amber Realty Co., 272 U.S. 365 (1926). 
3. Penn. Coal Co. v. Mahon, 260 U.S. 393, 415 (1926).
4. 505 U.S. 1003, 1019 (1992).  Lucas reversed prior precedent that nuisance exception regulations were not a taking.  See 2A Nichols on Eminent Domain § 6.01[13][c] (Rev. 3d ed. 2004).
5. Penn Coal, 260 U.S. 393.
6. 2A Nichols on Eminent Domain §§ 6.01[7], 6.01 [2].
7. 272 U.S. 365 (1926).
8. Lingle v. Chevron, Inc., 544 U.S. 528, 538 (2005).
9. 453 U.S. 419 (1982).
10. Id.; Burke, Barlow, Understanding the Law of Zoning and Land Use Controls § 3.0I (2002).
11. Burke, Barlow. Understanding the Law of Zoning and Land Use Controls § 3.01 (2002).
12. Lucas, 505 U S. at 1019.
13. Tahoe-Sierra Preservation Council, Inc., v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002).
14. Id.
15. 544 U.S. 528, 538 (2005).
16. 438 U.S. 104 (1978).
17. Penn Central, 438 U.S. at 124.
18. Id. at 130-31.
19. Id. at 134-35.
20. Lingle, 544 U.S. at 539.
21. 477 U.S. 225, 260 (1980).
22. Lingle, 544 U.S. at 542.
23. Id.
24. Id. at 543.
25. Id. While Lingle did away with the Agins test, Nollan v. California Coastal Commission, 483 U.S. 825 (1987) and Dolan v. City of Tigard, 512 U.S. 374 (1994) remain good law when analyzing exactions. The question posed by Nollan and Dolan was not did the regulation substantially advance some purpose but whether the exactions substantially advanced the same interests that the permit authority asserted were the grounds for denying the permits in the first place.  See 544 U.S. at 547-48.
    

An ongoing series on new emissions legislation brought to you by the Graham and Dunn Natural Resource and Manufacturing Team

Without question, the cutting-edge question in trademark law for the last several years has been whether keyword search advertising harms trademarks in a way that could sustain a lawsuit. A secondary issue is whether such a lawsuit may be brought against the advertiser only or against the search provider as well. These issues are the subject of a long-awaited opinion that the Second Circuit Court of Appeals handed down recently in the long-fought case of Rescuecom v. Google, 06-4881-cv (2d Cir., Apr. 3, 2009).
 
What is keyword search advertising?

Keyword search advertising is a form of advertising whereby a search engine sells advertising placement to an advertiser based on specific words or phrases that a user of the search engine enters as search terms. The advertiser who enters into this kind of arrangement with a search engine benefits by having its ad or sponsored link displayed whenever any of the search terms it has chosen are entered by a user. even if those search terms include the trademarks of the advertiser's competitors.

What is the dispute about?

At core, the dispute is about whether, in a keyword search advertising arrangement, the search engine or the advertiser or both are infringing the rights of competitors whose trademarks are on the list of keywords the advertiser has chosen to trigger its ads. Those who oppose this practice say that it infringes trademark rights because consumers who enter certain search terms and are then subjected to a search results display that also includes ads and sponsored links placed by others are likely to be confused as to the relationship between the party whose trademark they entered as a search term and the parties who placed the ads and links. Those who defend the practice say that it is nothing more than comparative advertising, similar to placing products on shelves next to competing products, or advertising that “if you are looking for this kind of product, take a look at ours.” Supporters further assert that consumers know the difference between search results and advertising, and are unlikely to be confused; indeed, the Federal Trade Commission has promulgated rules requiring search engines to make advertisements and sponsored links visually different from search results precisely to avoid such deception or confusion. Another argument is that, as a matter of economic policy, consumers searching for information on a particular type of product are likely to benefit from receiving information about similar competing products.

What have the courts held?

Thus far, no court has found a search provider liable for engaging in the practice of keyword search advertising, though individual advertisers have been found in some cases to be liable where the advertisements or links triggered by the chosen keywords were in themselves deceptive.

Why haven't search providers been found liable?

To be liable for trademark infringement under the Lanham Act (the trademark and unfair competition statutes of the United States), a defendant must be using the plaintiff's trademark, or a confusingly similar mark, in connection with an offering of goods or services in commerce. Search engines who have been sued by trademark owners over the practice of keyword search advertising have pointed out that a court may not consider the merits of the trademark owners' claims unless it is established that the defendant search engines are in fact “using” the plaintiffs' trademarks as the term “use” is meant in the Lanham Act. The issue of whether keyword search advertising is trademark infringement may not be addressed until the court is satisfied that the “use” requirement has been met. Keyword search advertising cases have thus been so far diverted into the question of whether or not this practice is a “use” of a trademark sufficient to trigger potential liability under the Lanham Act.

Most courts that have addressed the issue have found that it is a use of the plaintiff's trademark, and have moved on to consider likelihood of confusion, which is the test of trademark infringement. But even those courts that surmounted the “use” hurdle still have held that the practice of keyword search advertising is not, in itself, trademark infringement, and may result in liability only against an advertiser whose ads are themselves deceptive, either because they use the plaintiff's trademark or because they use no trademark at all, encouraging consumers to assume that the ads are associated with the company whose trademarks the consumer used as search terms.

However, until the recent Rescuecom ruling, the courts of the Second Circuit had held uniformly that keyword search advertising does not constitute a “use” of the plaintiff's trademark. Thus the new ruling resolves a disparity between the Second Circuit and the rest of the circuits.

Why did the Second Circuit courts find that keyword search advertising is not a “use” of a trademark?

In an earlier case, dealing not with keyword search advertising but with adware-triggered pop-up ads, the Second Circuit had held that the Lanham Act's “use” requirement was not satisfied because the purveyors of pop-up advertising did not display any trademarks of others in connection with an offering of goods or services in commerce, and that often the strings of keystrokes with which users triggered pop-up ads did not consist of or even contain the trademark of the aggrieved competitor. 1-800 Contacts v. WhenU, 414 F.3d 400 (2d Cir. 2005). Although the Second Circuit specifically distinguished its WhenU holding from the keyword search advertising type of situation, district courts of the Second Circuit began to apply the same analysis to keyword cases. One of those “no use” holdings, the Rescuecom case, was appealed. It was argued to the Second Circuit Court of Appeals in April of 2008, and ever since then, the trademark world has eagerly awaited the decision.

What did the Second Circuit decide?

The Second Circuit emphasized that its 1-800 Conacts v. WhenU opinion was particular to pop-up advertising, and had expressly distinguished itself from keyword search advertising. It then held that, contrary to the findings of Second Circuit district courts in a string of cases, a search provider does “use” a trademark in commerce when it offers that trademark as a suggested keyword search term to trigger a client's advertisements. Specifically, the court held that when Google's Keyword Suggestion Tool presents potential words and phrases to an advertiser as possible keyword choices for triggering ads, that constitutes a “display” of the trademark of any company whose trademark is among the suggested words, and thus is a “use” of the mark “in commerce.” The court specifically stated that:

First, in contrast to 1-800, where we emphasized that the defendant made no use whatsoever of the plaintiff's trademark, here what Google is recommending and selling to its advertisers is Rescuecom's trademark. Second, in contrast with the facts of 1-800 where the defendant did not “use or display,” much less sell, trademarks as search terms to its advertisers, here Google displays, offers, and sells Rescuecom's mark to Google's advertising customers when selling its advertising services. In addition, Google encourages the purchase of Rescuecom's mark through its Keyword Suggestion Tool. … Google uses and sells  Rescuecom's mark “in the sale . . . of [Google's advertising] services . . . rendered in commerce.”

The Second Circuit got this wrong in one respect. In a keyword search advertising arrangement, the search provider is not “selling” anyone's trademark to someone else. There is no purchase or sale of a trademark involved in such a relationship. What Google is selling is advertising placement. Specifically, it sold to Rescuecom's competitors the opportunity to have their ads appear when computer users searched for “Rescuecom” as a keyword. This is nowhere near the same thing as selling a trademark, and it is astonishing that such an august body as the Second Circuit Court of Appeals would think that it is.

Nevertheless, even if it had not said that Google was “selling” Rescuecom's trademark to its competitors, the Second Circuit persuasively found that Google had displayed that trademark in connection with an offering of services (namely Google's own advertising placement services), and thus had “used” the mark in commerce as required by the Lanham Act. In so holding, the Second Circuit decided that a search provider might, after all, be liable for trademark harm for engaging in a keyword search advertising program.

What did the Second Circuit not decide?

The Second Circuit's holding in Rescuecom did not decide that keyword search advertising is trademark infringement, nor that search engines are liable for this activity. It only decided that such programs are a “use” of the trademarks of others, satisfying the Lanham Act's use requirement. Rescuecom, and other plaintiffs, must still show that the practice is likely to cause consumer confusion in order to obtain relief or damages for trademark infringement.

So what happens next?

The Rescuecom case is remanded to district court, and Google must now face the plaintiff's claim of trademark infringement. The fact that Google's program does constitute “use” of a trademark in no way decides the case. For one thing, Google's first-line “no trademark use” defense is backed up by second-line trademark “fair use” defenses, including the assertion that they are not using the mark as a trademark for the specific goods or services they were offering, and that the use was a legitimate comparative-advertising use (which the Ninth Circuit acknowledges in its “Nominative Fair Use” doctrine). Only if Google's fair use defenses fail will the court consider whether there was a likelihood of confusion; and only if it finds a likelihood of confusion will Google be liable for trademark infringement.

One of the many problems presented by the likelihood of confusion analysis in this case is the fact that, if Google's suggestion of Rescuecom as a keyword search term to trigger ads for Rescuecom's competitors was a use in commerce of Rescuecom's trademark by Google, who was likely to be confused? The fact that a subsequent user of Google's search engine who keys in “Rescuecom” and ends up viewing ads for Rescuecom's competitors might be confused is irrelevant. Google's “use” of the Rescuecom trademark was in displaying it to Rescuecom's competitors as a prospective search term to trigger their competing ads. Therefore it is those advertisers, not the computer users who later enter “Rescuecom” as a search term, whose likelihood of confusion must be considered. Because Google displayed those trademarks as search terms, not as brands for its own advertising services, it is unlikely that Google's clients were likely to be confused. If later keyword searchers were confused because they saw ads for Rescuecom's competitors when they entered “Rescuecom” as a keyword, that is not the result of Google's display of Rescuecom's trademark to its advertising customers, but rather the result of the ads that were placed by Rescuecom's competitors and triggered by the keyword search.

But doesn't everyone already do this kind of thing? What's the big deal?

In truth, many advertisers routinely engage in keyword search advertising triggered by use of their competitors' trademarks, in the belief that this is simply comparative advertising and in no way illegal or likely to harm the competitor's trademark rights. It's also true that many companies whose trademarks are used in this way by their competitors do not sue, but instead simply engage in keyword search advertising of their own. If this were a universal practice (which it appears to be on the way to becoming), the result would be that a person who keyed in the trademark of one particular company would get search results for that company but would also get advertisements and sponsored links for both that company and some of its competitors. In terms of the consumer-information purposes that advertising serves, this is not necessarily a bad thing, and can in fact be a very good thing, since it furthers competition and broadens consumers' range of choice.

So where is all this headed?

I'll go out on a limb here and guess that it's headed toward vindication of the practice of keyword advertising as a form of comparative advertising that is unlikely to create consumer confusion and is therefore not trademark infringement (except in those cases where the triggered ads are themselves deceptive or confusing).  However, the courts have surprised me before, so I'll go out on a different limb and say this: If the court were to hold that Google's display of the “Rescuecom” trademark in the course of its keyword suggestion process is a use that is likely to cause confusion, what about words and phrases that have significance apart from being trademarks? If a distributor of fresh apples were to enter into a keyword search advertising agreement with Google to display its ads any time a consumer entered the search term “apple,” would that infringe the trademark rights of Apple Computer? It doesn't seem likely; in fact, such a result would be outrageous, and would upset the already delicate balance between the First Amendment and trademark law. So my guess is that if the court finds likelihood of confusion in the Rescuecom case, that holding would apply only to trademarks that are merely trademarks, and not to most trademarks, which have other meanings and non-trademark significance.

All right, then, what are the take-aways?

For now, if you're a search engine and you are offering advertising placement based on a user's input of keyword search terms that consist of or include someone's trademark, you might be liable for trademark infringement. though no court has as yet so held. If you are an advertiser entering into a keyword search advertising arrangement with a search engine, your best policy is to make sure your ads are clearly designated as coming from your company, and not likely to deceive or confuse consumers. Though, even if you do, the jury is still out on whether the practice of keyword search advertising, in and of itself, might constitute trademark infringement or unfair competition.

For more information contact Seattle Trademark Attorney, Robert Cumbow, or any of the member's of Graham & Dunn's Intellectual Property Law group.

The Changing Regulatory Environment

Over the past year, as the economy has continued to deteriorate, the bank regulatory environment has become more and more challenging. Many “experts” have predicted that as many as half the banks in the United States will be under some form of administrative action by year-end. Based on what we are seeing out there, that may become a reality.

As we get deeper into the recession, more current bank examinations uncover more problems, reflecting continuing credit deterioration. In part, this is purely a function of the economy, stressed borrowers and collateral values. In part, it probably reflects the increased scrutiny and caution of the bank examiners, who are concerned about missing any problems.

Plummeting Examination Ratings

As a result of this enhanced scrutiny and economic deterioration, exam ratings have continued to plummet. A “2” rating is the new “1” which is now the rating to embrace and be proud of. Double-downgrades from “1” to “3” and “2” to “4” from prior exams are commonplace. Offsite temporary downgrades between exams also are proliferating based on deterioration in Call Report numbers.

What does this mean? Well, a “3” rating gets you either a state action or Memorandum of Understanding (“MOU”). A “4” or”5” rating gets you a Cease and Desist Order (“C&D”), means you probably no longer meet “well-capitalized” status, and shuts you down from taking brokered deposits and significantly increases your deposit insurance premiums. As one of our clients points out, the difference between a “4” and “5” rating is worth fighting for since a “5” puts you in “distinguished” company status and under enhanced scrutiny.

The Best Defense is a Good Offense

How do you avoid a bad report card? Well, if your asset quality is bad, you have a problem. However, on the margin you can take a number of proactive steps to improve your rating, including:

• Identifying and properly classifying your problem assets.
• Enhancing your loan files and documentation.
• Ordering appraisals for property timely and as often as necessary.
• Strengthening collateral positions on problem loans.
• Being forthright and upfront with the regulators to build credibility.
• Aggressively restructuring and/or disposing of problem assets.
• Raising capital, if possible.
• Improving your balance sheet and off balance sheet liquidity.
• Understanding your liquidity position; stress test it; having a contingency funding plan.

While these steps are not a guarantee that you will avoid all regulatory pitfalls, they could, on the margin, make the difference in your overall “CAMELS” rating, whether you get an administrative action, the type and severity of such action, the tone of the exam report and the timeframe to get out from under such action.

What If You Get a Proposed Administrative Action?

Our research and experience shows that most administrative actions have certain “core” features. However, you can negotiate specific provisions and timeframes to reflect your particular bank's situation.

The regulators are anxious to get these administrative actions in place, particularly since they have been internally and externally criticized for not acting quickly enough. However, we advise our clients to try to negotiate terms that they believe they can live with and meet. Remember, the regulators have extensive powers to enforce violations of formal “written agreements”, including the assessment of civil money penalties, removal of officers and directors, and, in extreme cases, termination of deposit insurance. While few of these additional enforcement powers have been used recently, given the changing economic and regulatory environment, history may not be a good predictor of future action. So be careful to what you agree. Obviously, you should utilize experienced counsel to guide you through this foreign process.

Disclosure Considerations

C&D Orders are placed on the issuing federal bank regulator's website and are therefore public. Accountants will require their disclosure in your notes to financial statements. MOUs and state enforcement actions are not per se publicly disclosed. However, our recent experience is that accountants are typically requiring disclosure in financial statements, particularly if there are capital requirements or dividend restrictions. Also, many public companies are disclosing any form of administrative action as a matter of prudence and conservative practice in today's economic environment.

When Will It All End?

Most prognosticators suggest that the economy will not bottom out until year-end. If this is the case, more current exams will undoubtedly reflect this continued deterioration in credit portfolios and underlying collateral values. So, more administrative actions should be expected until the cycle ends and economic recovery begins. In the meantime, you will need to deal with a challenging regulatory environment, with overworked and highly stressed examiners trying to cope with an unprecedented environment.

While the regulatory environment has been difficult, we must admit it has not been hostile. However, with real estate values continuing to tumble and capital almost impossible to access, some of the demands by regulators seem unreasonable. We think everyone needs to adjust their sights and let things play out a bit and stabilize. Time should be everyone's ally.

If you should have any questions or wish to discuss issues specific to your financial institution please contact any of the following members of the Graham and Dunn Financial Services Team:

Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com),
Kumi Yamamoto Baruffi (206.340.9676 or kbaruffi@grahamdunn.com),
Casey M. Nault (206.340.4808 or cnault@grahamdunn.com),
or Jane H. Kaufman (206.340.9663 or jkaufman@grahamdunn.com).

Lenders who understand the unique and complex aspects of hotel collateral can avoid costly missteps and resulting losses. The “recession-turned-meltdown” has put intense pressure on the hotel industry. As the pressure continues to build, many hotel loans are in default or soon will be.

Beginning last fall, consumers, seeing their net worth and savings evaporate, cancelled vacations and travel plans. Entering the winter, businesses began layoffs to respond to shrinking demand, and travel continued to decline. Congress then piled on, claiming that business meetings and conferences were mostly boondoggles taken at taxpayer expense. Companies cancelled all “nonessential travel,” and group and transient business dried up. Hotel industry analysts, as recently as last June, had predicted a 2.8% RevPAR increase for 2009. Now they predict a 2009 decline of between 10% and 30%, depending on the region and segment, with the upscale segment taking the biggest hit. These RevPAR decreases convert to NOI decreases of 20% to 60% and, with increasing cap rates, a loss of hotel value of 50% or more.

Many. if not most. upscale hotels that have been financed within the last five years are now in loan covenant default. This year, so far, relatively few hotel loans have fallen into monetary default, as owners use up their reserves to meet debt service. This cannot last. By June, hotel lenders will see increasing monetary defaults.

What should lenders with hotel collateral do? In January, we responded by forming our Hotel Asset Resolution Task Force (HART Force), bringing the specialized legal and industry skills and resources to stakeholders involved with troubled hotel assets. Below are now some obvious. and not-so-obvious. pointers specifically for hotel lenders.

The Obvious

• Find out if you have any hotel loans. Because hotel loans typically are interspersed among a bank's other commercial real estate loans, the first task is to find out if your commercial loan portfolios include any hotel loans. If they do, then you can begin to make reasonable choices about them.
  
  
• Recognize that any hotel loan is at risk. If you have hotel loans that were funded in the last five years, expect that they are in trouble, even if there is no current monetary default. Most upscale hotels that are leveraged at 60% or more are using up and running out of reserves. The time to evaluate your alternatives is now, before you face a loan default or operational deficits that will require the bank's cash just to keep the hotel open.
  
  
• Understand that hotels are not like other collateral. Hotels are not like other commercial real estate. Although hotels are often housed in a box that looks deceivingly similar to an office building, they are complex, operating businesses within that box. A typical upscale hotel includes restaurant businesses, cocktail lounges, retail outlets, landlord operations, spa operations, laundry and housekeeping operations, recreational facilities, parking operations, and, of course, nightly rooms rental, all run by 100 or more on-site employees. The legal structures are complex, usually involving a national brand under a franchise agreement or a “branded hotel management contract”. a complex, industry-specific contractual relationship. Equity structures are often multi-layered. Residential components or even “condo hotel units” can be intertwined with reciprocal easements and other rights that impact the value of the hotel and its flexibility.
  
  
• Line up reputable, industry-knowledgeable legal and business advisors. The hotel industry is a tight-knit community, and hotel skill sets are specific, specialized, and held by people and companies dedicated to the industry for years or decades. Without access to industry knowledge and experience, you have little hope of achieving satisfactory results. To adequately exert control and then stabilize, manage, and market these complex assets, you will need the assistance of legal and other advisors who know the hotel industry, are experienced with all aspects of hotels, and can apply this industry, legal, and business knowledge for best advantage.
  
  

The Not-So-Obvious

• When a hotel goes dark, its value takes a nose-dive. If a borrower's business is losing money, the lender's ultimate recourse usually is to sweep the accounts, collect accounts receivable, force a liquidating “going-out-of-business” sale, and then sell any remaining real estate. This approach works with hotel collateral only if the hotel is such a poor performer that the property should just be scraped. If this is not the case, then the hotel facilities are usually worth money only as a hotel. hotel facilities are so specialized that they typically are worth very little for any other purpose. Then, your choice usually is either to sell the hotel as an operating hotel or as a “dark” hotel. Of these two choices, the second is almost always disastrous. The reason is that, when a hotel goes dark, two large capital investments are lost. The first is the capital outlay required to open the hotel after it is built. this is the cost of locating and hiring a capable work force and of outfitting the hotel with liquor, food, etc. The second is the large chunk of capital required to get through, typically, three years of deficits, while the hotel establishes its customer base, becomes efficient in its operations, and reaches “stabilization.” If a hotel is allowed to go dark, these capital investments vaporize. Any buyer of the hotel will then need to take into account the cost of making these investments again, as well as the risk that stabilization will not be achieved as planned. To avoid this impact on collateral value, you absolutely must be proactive. You must see any operational deficits coming well in advance and decide how to fund them, if necessary, to prevent the hotel from going dark.
  
  
• Consider receivership. Working with a cooperative, honest, and capable borrower to achieve a satisfactory resolution can be a sensible strategy. Other times, you may feel that the borrower is out of rope, especially if additional funds are required to avoid a hotel closure. Receiverships can provide a way to fund operations and run the hotel without leaving the borrower in control. Receivership laws vary from state to state, but most work very well for hotel assets. A key in using receivership laws is to successfully identify and put in place a receiver that knows hotels. Many reputable management companies are very interested in serving as a receiver, and some see receivership as an opportunity to “manage to own.” But conflicts of interest can arise. You need experienced counsel to help select the right receiver, formulate the receivership order, and establish the strategy for using the receivership to stabilize and dispose of the hotel.
  
  
• Rethink whether you have priority over unsecured creditors. It is true that secured lenders have priority over unsecured creditors, such as trade vendors and managers. Accordingly, you have the power to foreclose and not pay vendors, payroll, etc. As indicated above, however, a hotel's value is largely dependent on the hotel's operation. If you foreclose in a traditional way, the value of the operation will be so damaged that you typically will lose, many times over, any savings from foreclosing out unsecured creditors. As a result, rethink whether you can practically take priority over the hotel's unsecured creditors.
  
  
• Determine whether the SNDA should be enforced. The “Subordination and Nondisturbance Agreement,” between the lender and the hotel's management company, is an important document. If the management company was asleep at the wheel, you may have what appears to be the holy grail of SNDA's. it may state that you can sweep the operating accounts and leave the hotel management company to fund payroll and operating expenses. These rights often cannot be exercised, however, without seriously damaging the operation and the value of the collateral. Before you use these rights, take a well-considered look at the actual impact of doing so.
  
  
• Think like a hotelier. Your recovery will depend on how you preserve or improve the value of the hotel operation. This means that, like it or not, you have to begin to think like a hotelier. How is the hotel positioned? Is the hotel management company doing a good job? Is it the right company for the property? What can be done to improve the hotel's value as you exercise your rights? Obviously, you need advisors that can help with these choices, as well as legal counsel with industry contacts that can help you get to the right resources and steer clear of pretenders.
  
  
• Know the condition of the hotel. Many hotel owners are neglecting facility maintenance and putting off necessary repairs. Will you be inheriting assets with mold, façade issues, ineffective or dated HVAC, ADA or structural issues? Are there extraordinary liabilities that should be considered or handled before you move toward control or foreclosure? Require a Maintenance Enforcement Program survey (“MEP”) before embarking on your realization strategy.
  
  
• Review obligations to the brand. Most hotel assets will have a brand or flag. Does the brand hurt or help the hotel's value? If the brand impairs value, evaluate your legal rights to shed the brand, under the SNDA or otherwise. If the brand enhances value, review and understand the commitments made to the brand. For example, the brand may be engaged in repositioning efforts (for example IHG is in the midst of a brand repositioning for all Holiday Inn hotels and is requiring expensive signage changes and other upgrades). Or the hotel may be currently required by the brand to perform a major upgrade of the facility (known in hotel parlance as a “PIP”). Triage may be required to prevent the brand from imposing penalties or even terminating the right to fly the flag.
  
  
• Evaluate the leverage over the borrower. Because hotel collateral is fragile and dependent on the hotel's operation, there is considerable value in your ability to motivate the borrower to assist you in reaching your objectives. Do you have personal recourse against the borrower? Is the borrower facing a big tax bill if the borrower gives you a deed in lieu? Be up front with the borrower and his needs. A cooperative, well-motivated borrower can lead to enhanced collateral value and a successfully executed realization plan.
  
  
• Understand and anticipate special problems, such as liquor licenses. Every upscale hotel has liquor licenses that are essential for revenue. If a lender has a receiver appointed, takes a deed in lieu, or forecloses, the liquor license must be transferred. The transfer often requires several weeks and many detailed disclosures from the new licensee. Think ahead. being forced to close down the hotel's bars can be extremely costly. Make sure your counsel's team includes experienced liquor license attorneys that can address these issues.
  
  
• Beware of multi-faceted hotel assets. All hotels are complicated assets, but some are “over-the-top” for the uninitiated. A hot segment over the last six years is the “condo hotel.” Assets such as these present a myriad of complications See Troubled Condo Hotel Workouts. For example, if a foreclosing lender sells a condo hotel unit without following specific, well-considered procedures, the foreclosing lender may inadvertently violate federal or state securities laws.
  
  

Meeting the Needs

The challenges to hotel lenders are daunting. To help clients successfully address them, in January 2009 Graham & Dunn announced the formation of its Hotel Asset Resolution Task Force. See Graham & Dunn Establishes.... HART Force employs Graham & Dunn's nationally recognized Hospitality Industry Group. Its members have assisted the Industry since 1990, and, in previous down-cycles, have successfully addressed the very legal issues and challenges facing the industry today. The Task Force is further enhanced and combined with the extensive banking industry resources of Graham & Dunn's Financial Services Group and the firm's bankruptcy/insolvency, real estate, labor and employment, litigation, and construction practices.

The Hotel Resolution Task Force is led by Hospitality Industry Group partners Irvin W. Sandman and Russell C. Savrann, in close coordination with Financial Services Group and bankruptcy partner Mark D. Northrup, Real Estate Group partner Douglas J. Smart, and litigation partners Douglas C. Berry, Stephen H. Goodman and Steven A. Miller.

The Task Force provides advice to clients about, and access to, the Hospitality Industry Group's wide-ranging contacts and resources in the hotel industry. These resources include, among many others, the advisory, economic, and disposition services of CBRE Hotels and companies that can assist with a broad range of segments and brands, including highly-regarded independent hotel management companies.

Please contact Irvin W. Sandman (206.340.9641 or isandman@grahamdunn.com), Mark D. Northrup (206.340.9628 or mnorthrup@grahamdunn.com), Steven A. Miller (206.903.4806 or smiller@grahamdunn.com) or Russell C. Savrann (203.215.5186 or rsavrann@grahamdunn.com) if you have any questions about Graham & Dunn's Hotel Asset Resolution program and how it pertains to your holdings.

On Tuesday, March 10, the Employee Free Choice Act (“EFCA”) which was passed in the House in 2007 but fell short of the votes required to break a filibuster in the Senate, was reintroduced in Congress. A major promise when President Obama spoke to union groups during the presidential campaign was that he would sign it into law. There is little question that EFCA would assist union organizers because of its three key provisions:

1. Eliminating the current requirement for a secret ballot election, in which employees vote for or against union representation, instead accepting signed union cards as proof of the union's status as the employees' bargaining representative;
2. Increasing penalties against employers accused of pressuring or penalizing workers who support a union-organizing campaign;
3. Providing that if an employer and union do not agree on the terms of their first collective bargaining agreement within 90 days after bargaining begins, either party may refer the dispute to federal mediation to facilitate negotiations, and if mediation does not result in a settlement within 30 days, the dispute will be referred to a government-appointed arbitrator, who will set the terms of employment for two years.

Meanwhile in Olympia, a labor-backed bill, known as the “Worker Privacy Act,” was killed on Friday, March 13. by the Governor, along with the Senate Majority Leader and the House Speaker. after inappropriate lobbying by organized labor was uncovered by the Seattle Times. The Act would have let employees refuse to attend mandatory meetings in which employers tell their side of the unionizing issue. So-called “captive audience speeches”. mandatory meetings employees are paid for attending. can be an important avenue for communicating an employer's message about unions, but unions may speak with employees on working time under certain circumstances. Employers are not allowed to visit employees at their homes to share their message. Opponents argue that this law, if it had passed, would violate “free speech” rights of employers under the law, and upset a balance that allows both sides to reach workers with their message.

Card Check Versus Secret Ballot Election

Union organizing drives start with collecting signed “authorization cards,” which state that the employee signing the card wants that union to be his or her bargaining representative. Currently, an employer can demand a secret ballot election even if a majority of employees has signed authorization cards. Among reasons cited for the current requirement of a secret ballot election, in order to obtain informed, uncoerced votes, is the concern that authorization cards are gathered when only the union organizer's side has been heard, and card-signing may be influenced by peer pressure from fellow workers supporting the union. Under current law, employers may accept signed authorization cards as sufficient proof that a majority of employees want union representation, but may insist on a secret ballot election, conducted after a period of a few weeks of campaigning and typically after the employer has had time to get its message out. Most employers insist on an election. Union organizers contend that during a campaign, employers have better access to the employees for delivering their message, and can pressure employees or engage in reprisals which kill support for a union.

EFCA would not per se eliminate the election process, which can be initiated by cards collected from 30 percent of the bargaining unit employees; however, a union which has collected cards from over 50 percent of the employees (not just the 30 percent required to get a secret ballot election) could force unionization without one. As a practical matter, expect secret-ballot union elections to be eliminated. Although a union can obtain an election under current law if it has signatures from 30 percent, rarely does it file a petition without more than the 50 percent needed to win, because, as time passes, that percentage generally erodes with employer campaigning.

EFCA provides that the National Labor Relations Board will adopt regulations addressing how to establish the validity of signed authorization cards.

First Contract Mediation and Arbitration

In the public sector, “interest arbitration”. use of an arbitrator who does not just facilitate agreement on the terms but sets them himself. is not uncommon, under the laws of the various states. (Public employees' bargaining is not governed by the National Labor Relations Act, but rather by state law, if at all.) However, it is all but unheard of in private sector labor relations. In private sector bargaining, the Federal Mediation and Conciliation Service (FMCS) provides mediators to assist union and management in reaching agreement where bargaining has stalled. However, the FMCS is just a facilitator which does not have authority to dictate the terms of a contract if the parties can't reach agreement themselves. EFCA would radically change collective bargaining: unless the parties agree on a contract in the first 120 days, the FMCS will refer the dispute to an arbitration panel to dictate the employment terms.

Proponents of the legislation argue that current remedies against stonewalling employers are so weak that they can, in effect, win by “surface bargaining” instead of negotiating in good faith. The pressure is on a union to obtain a contract within the first year after it is certified as the employees' bargaining representative, because at the end of that “certification year,” the union loses its insulation against attempts to decertify it. Opponents of the legislation point out that there are already remedies for bargaining in bad faith and that, if workers believe they are not getting a fair offer, in the private sector they can strike.

As a practical matter, the provision for “interest arbitration” assures a union of getting a “first contract” on terms dictated, not by bargaining leverage, but by a government-appointed arbitrator. This also would help a union organize workers in the first place, because with EFCA the union could now make a guarantee it could not honestly make before. that it will get more than just negotiations, it will get a contract. without striking. the terms of which will not be dictated by their employer's bargaining leverage.

Increased Penalties for Unfair Labor Practices

EFCA would require the NLRB to seek an injunction when there is reasonable cause to believe that employers have pressured or penalized employees, or engaged in other conduct that significantly interferes with employee rights during an organizing drive or first contract negotiation. It also calls for increases in monetary penalties for employers who pressure or penalize employees during an organizing campaign or first contract negotiations, including triple lost pay, and civil fines of up to $20,000 per violation against an employer found to have willfully or repeatedly violated employee rights during an organizing campaign or first contract negotiation. Currently there are no civil fines for violations.

Prospects for Passage?

EFCA legislation died in Congress last time because, in the Senate, Democrats failed (by nine votes) to obtain the 60 votes needed to invoke cloture to end the opponents' filibuster. (A motion for “cloture” in parliamentary procedure is one aimed at bringing debate to an end.) In the U.S. Senate, to overcome a minority's filibuster, a super-majority of 60 out of the 100 senators suffices. Democrats hold 56 seats now, 57 if Al Franken is seated in Minnesota, and there are two independents who typically vote with the Democrats. Strong pressure can be expected from the business community to kill or revise EFCA. And on March 25, there were reports that Senator Arlen Specter, a moderate Republican, will vote against it, although he would consider an anti-business measure of this kind when the economy recovers.

Some Thoughts for Proactive Employers

If EFCA becomes law, the need to understand the often tricky rules about what is and what is not “unfair” conduct by employers in a union-organizing campaign or in contract negotiations will be even greater than it already is, and effective campaigning by employers, within the rules, will be required much earlier in the process. at the card-signing phase of organizing. Traditional pre-election campaigning will come too late. Awareness of do's and don'ts when discovering a union organizing campaign is underway, and dealing with it early, will be a must.

For more information, contact attorney Clemens H. Barns at

The following article was published in Landslide, Volume 1, Number 4, March/April 2009.  Copyright 2009 by the American Bar Association.  All rights reserved.

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Scared of getting sued for patent infringement in the Eastern District of Texas? That fear may no longer be warranted.

For several years, patent plaintiffs found a friendly forum in the so called “rocket docket” Eastern District of Texas. That district was considered so “plaintiff friendly” that rough estimates place patent infringement cases filed there at over 50%. Despite cases where neither party was incorporated, had an office or distribution in the Eastern district, but merely only sold product in the district, the Eastern District would routinely refuse to transfer venue in patent infringement cases. Given that patent infringement awards can routinely run in the many millions of dollars, defendants hauled into the Eastern District of Texas had reason for concern.

Concern about this unique district court willfully taking on all patent infringement cases even made its way into the patent reform bill that is was reintroduced before the Congress. The Senate counterpart of the bill (S. 1145 -110^th Congress) would prohibit judicial districts from taking cases where:

1. the defendant of a patent infringement case (or in a declaratory judgment action) does not have its principal place of business or is incorporate or formed;
2. the defendant has not committed substantial acts of infringement and does not have a regular and established physical facility that the defendant controls and that constitutes a substantial portion of the operations of the defendant; and
3. where the primary plaintiff does not reside.

A defendant may request the case be transferred where:

1. any of the parties has substantial evidence or witnesses that otherwise would present considerable evidentiary burdens to the defendant if such transfer were not granted;
2. transfer would not cause undue hardship to the plaintiff; and
3. venue would be otherwise appropriate under 28 U.S.C. §1391.

However, even the proposed change appears to be no longer necessary in order for the defendant to obtain relief from blatant forum shopping. At the very end of 2008, on a writ of mandamus, the Federal Circuit Court of Appeals ruled that the Eastern District of Texas had abused its discretion by failing to transfer a patent infringement case to a more convenient forum, namely the Southern District of Ohio. In re TS Tech USA Corporation, 551 F.3d 1315 (Fed. Cir. Dec. 29, 2008).

In the underlying litigation (Lear Corp. v. TS Tech, No. 2:07-CV-406), Lear, a Delaware corporation with its principal place of business in Southfield, Michigan, filed its patent infringement suit against TS Tech USA, an Ohio corporation with its principal place of business in Reynoldsburg, Ohio, in the Eastern District of Texas based on the allegation that TS Tech had been making and selling infringing pivotal headrest assemblies to Honda Motor Co., Ltd. and further that TS Tech knowingly and intentionally induced Honda to infringe the patent at issue by selling the headrest assemblies in Honda vehicles throughout the United States, including the Eastern District of Texas. When TS Tech filed a motion pursuant to 28 U.S.C. §1404(a) to transfer venue of the case to the Southern District of Ohio, the district court refused because several (Honda) vehicles with TS Tech's allegedly infringing headrest assembly had been sold in the district and that the citizens of that district has a substantial interest in having the case tried locally.

For those that feared being hauled into the plaintiff friendly Eastern District of Texas for patent infringement merely because they sell a product or provide a service that can be found in Eastern District of Texas, the Federal Circuit has signaled “enough is enough” and are willing to grant the extraordinary remedy of a writ of mandamus if the district court refuses to transfer the case and there is good reason to do so. This case may indeed have much greater impact across the country. at least with regard to patent infringement cases. Even though the Federal Circuit applied only 5^th Circuit law, the logic may be used for other blatant patent forum shopping cases. But for now, defendants can make a venue challenge with greater certainty in patent cases filed in the Eastern District of Texas where the parties have no offices in the district, do not do business (beyond mere conduit) in the district, and in which no key witnesses reside in the district and not merely because the plaintiff wishes the case to be there.

Preface

Well folks, we are now in the middle of the most incredible economic vortex any of us has ever seen or could have imagined. I say it is time to take some critical, concrete steps to stem the tide and stop us from drowning.

The FDIC Fund

Let's face it, at 40 basis points (even with a likely 10 basis point special assessment), the deposit insurance fund is probably going to be tapped out soon. If only those assessments had continued during the last decade of unparalleled prosperity and earnings. Oh well, one can dream. But back to reality. The FDIC, in this man's opinion, has to allow banks that have a reasonable chance of surviving to gradually wean themselves off brokered deposits and not go cold turkey and expire from lack of liquidity while still possessing adequate capital.

If we accept the premise that the fund is inadequate, we must move away from a liquidation to a going-concern mentality. Only time will heal the wounds we have inflicted on ourselves. This is especially the case now that the industry is too crippled to fully replenish the fund.

Mark-to-Market Accounting

The notion of mark-to-market accounting of assets in a true fire sale environment is ludicrous and becomes a self-fulfilling prophecy. Stop it! This is again a liquidation, not going concern approach. If you were to dump a huge amount of any product on the market all at once, of course prices would hit rock bottom. Has anyone in Washington, D.C. ever heard of supply and demand? How about reading Chapter 1 of Samuelson on Economics?

As my old D.C. friends remind me, “D.C. is an island surrounded by reality.” Out of touch is a true understatement. Allow banks to dispose of toxic assets in an orderly fashion or else we are just socializing the losses and privatizing the profits.

Government Guaranteed Loan Program

Finally, a small light went off with the recently announced Fed $200 billion lending program. It needs to be some multiple of that. The Stimulus package is an expensive bureaucratic, ill-conceived, time-consuming waste. Why not simply have a massive government guaranteed lending program similar to the SBA, allowing banks to lend to businesses and individuals? Isn't it better to keep these distressed small businesses alive and keep people in existing jobs than creating make work jobs and positions that will take forever to develop at $250,000 a pop? This will temper the awful unemployment trend and let people keep their dignity and stay engaged.

Conclusion

I realize that this is a very complicated problem, but taking concrete steps to rebuild consumer confidence in the economy and our banking system is a good way to start.

If you should have any questions or wish to discuss issues specific to your financial institution please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com).

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the "Act") into law. The Act made changes to the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") that will impact many employers. It provides a government subsidy for a portion of the COBRA premium payments that employees losing their jobs would otherwise have to pay in order to maintain medical insurance coverage. In addition, it provides a special COBRA extended election period for COBRA coverage so that employees who were involuntarily terminated from employment on or after September 1, 2008, but did not originally elect COBRA continuation coverage, can take advantage of the subsidy. The subsidy is available for periods of coverage beginning on or after March 1, 2009.

COBRA Premium Subsidy

COBRA provides that employers generally must offer "qualified beneficiaries" (generally, an individual covered by a group health plan, and the spouse and dependents of such individual) the option to elect to continue health coverage following involuntary termination of employment. Premiums for coverage must be paid by the qualified beneficiary. Under the Act, the federal government will subsidize 65 percent of the premiums for a period of up to nine months, if the qualified beneficiary is an "assistance eligible individual." An “assistance eligible individual" is a qualified beneficiary who:

• Is eligible for COBRA continuation coverage at any time during the period beginning September 1, 2008 and ending December 31, 2009;
• Elects COBRA coverage (when first offered or during the additional election period); and
• Has a qualifying event for COBRA coverage that is the covered employee's involuntary termination of employment during the period beginning September 1, 2008 and ending December 31, 2009.

Extended Election Period

The Act provides a special extended election period for COBRA coverage for an individual who does not have COBRA continuation coverage in effect as of February 17, 2009, the date of enactment of the Act, but who would have been an assistance eligible individual if such election were in effect. Such individuals may elect to receive COBRA coverage and participate in the subsidy program during the period that begins on February 17, 2009 and ends 60 days after the individual receives notice of the special extended election period. So, for example, an individual who was involuntarily terminated from employment after September 1, 2008 but did not elect COBRA continuation may now enroll in his former employer's health plan and receive the government's subsidy for the premiums. In the case of individuals who elect coverage during this special extended election period, coverage begins with the first period of coverage beginning on or after February 17, 2009 and not from the date of termination. Coverage will not extend beyond the period of coverage originally required had COBRA coverage been elected at the time of termination (generally 18 months from the date of termination).

Reimbursement of Premium Subsidy Through Payroll Taxes

The premium subsidy provision of the Act is implemented through the payroll tax system. The Act treats the 65 percent of premium amount otherwise payable by an assistance eligible individual as payroll taxes that were previously paid by the employer. The employer is allowed to credit that amount against its payroll tax obligations. If the amount treated as previously paid payroll taxes exceeds the employer's actual payroll tax obligations, the employer can claim a refund.

High-Income Individuals Not Eligible For Subsidy

An individual is not eligible for the premium subsidy if his modified adjusted gross income for the taxable year in which the subsidy is provided exceeds $145,000 ($290,000 for a joint return). In addition, the subsidy is phased out incrementally for individuals with modified adjusted gross income between $125,000 ($250,000 for a joint return) and $145,000 ($290,000 for a joint return). An individual who receives the premium subsidy, but is not entitled to all or part of it because his modified adjusted income exceeds a threshold amount, is subject to income taxes on the excess.

Notice Requirements

The Act imposes new notice requirements on employers, including the requirement to provide notice to those entitled to elect COBRA continuation coverage of the subsidized premium program; the option to enroll in a less expensive plan, if the employer permits this option; the extended election period; and the individual's requirement to notify the plan sponsor of his or her becoming eligible for health coverage under another plan. The Act requires the Secretary of Labor to publish model notices by March 19, 2009.

What You Need To Do

The notice described above must be given to the following individuals:

• In the case of involuntary terminations of employment of a covered employees between February 17, 2009 and December 31, 2009, all assistance eligible individuals; and
• In the case of involuntary terminations of employment of a covered employees between September 1, 2008 and February 17, 2009,
  • assistance eligible individuals who are currently receiving COBRA; and
  • individuals who did not elect COBRA continuation coverage, by are otherwise assistance eligible individuals.

Although model notices are not required to be published until March 19, 2009, employers should begin now to identify those individuals to whom notices must be sent. In the case of individuals who did not elect COBRA continuation coverage, but are otherwise assistance eligible individuals, the notice must be given by April 18, 2009, so prompt action is required.

If you have any questions or wish to discuss this issue further, please contact Denny F. Wong at 206.340.9612 or dwong@grahamdunn.com, or any of the members of Graham & Dunn's Labor and Employment Practice Group:

Clemens H. Barnes (206.340.9681 or cbarnes@grahamdunn.com)
Judith A. Endejan (206.340.9694 or jendejan@grahamdunn.com)
April Upchurch Olsen (206.340.9597 or aolsen@grahamdunn.com)

With the loss of 600,000 jobs in January alone, and unemployment rates soaring to 7.6%¹, many companies are doing everything they can to reduce operating expenses in light of the economic downturn. As a result, many businesses have significantly reduced their workforce by implementing layoffs, or by terminating select employees with substandard performance. Whether your company is considering an isolated termination, or a larger reduction-in-force, there are practical steps that you can (and should) take to reduce the risk of employment litigation.

Most employees are “at will” meaning they can be discharged for any reason or for no reason. There is one caveat to “at will” employment, and that is, that an employee may not be discharged for an illegal reason. With the many employment laws designed to protect employees from illegal conduct, most motivated employees can find a legal basis to sue their employer despite being employed at will. In fact, the Equal Employment Opportunity Commission, the federal agency responsible for processing discrimination claims, has reported a 15.2% increase in the number of discrimination charges filed against employers in 2008, and we predict an even larger increase in 2009². Although every employer incurs some legal risk simply because of its status as an employer, by following the steps outlined below you will minimize that risk, but also place yourself in the best position to defend any lawsuit or EEOC charge that may come your way.

Implement Good Personnel Policies
Every employer should have solid personnel policies. Personnel policies are designed to communicate expectations to employees, and to let employees know what is and is not appropriate at work. In turn, these policies frequently support the employer's reason for employee discipline and discharge. Additionally, Personnel policies often include important legal regulations, and may even be required by some laws. These types of policies (harassment/discrimination/no-retaliation, the Family Medical Leave Act, disability and religious accommodation, and meal and rest break requirements) demonstrate to plaintiff's counsel and to the court that you, as the employer, understand your legal requirements, that you communicated those requirements to employees, and that you took proactive steps to implement the law.

Routinely Counsel Employees Regarding Poor Performance
Employees with performance problems should receive honest feedback on an ongoing basis-not just at year end. Most employees want to do a good job, and assume they are doing a good job unless you tell them otherwise. Without this critical feedback, an employee's performance will continue to suffer, and you as the employer will continue to get frustrated. Employers who are reluctant to give true feedback frequently reach the proverbial “straw that broke the camel's back” and move straight to termination without first laying the groundwork. Any resulting termination is a surprise (and perhaps a complete shock) to the employee, who doesn't understand what happened. Although an employee's reaction to his or her termination is not our first concern, an employee's surprise is frequently what gets the employer into hot water because the employee starts looking for the “real” reason she has been terminated (i.e., is it because the employee is pregnant, requested FMLA leave, complained about perceived sexual harassment etc.). An employee ostensibly terminated for performance, but not given any information about his or her performance may end up at the EEOC, or worse yet, consulting with a lawyer. The problems can frequently be avoided if you, as the employer, have done your job and counseled the employee appropriately.

Document Misconduct and Performance Counseling
Documentation plays an important role in laying the groundwork for any employee termination whether it's a termination for misconduct or poor performance. If you have done the performance counseling suggested above, you should have documented the dates on which you spoke with the employee, the performance issues discussed, how the employee intended to resolve the issues, and the consequences if the employee does not improve. If a termination is based on misconduct, you will want to document the circumstances surrounding the misconduct, including any investigation you may have done into the incident. This documentation is critical for you, as the employer, to justify your reason for discharging the employee. If you've done this, you are in a much better position to defend yourself if you do end up in litigation.

Conduct A Risk Assessment For Each Employee Termination
Some employment terminations present increased legal risks simply because of the circumstances. To understand your risk, consider whether the individual is in a protected class, has complained about discrimination/harassment, has disclosed a pregnancy or otherwise requested time off under a federal or state leave law, or has made any wage and hour complaints. Assuming the motivations for the termination are legitimate, the answer to these questions may not make any difference. Nonetheless, you should still be aware of timing and whether the employee may perceive that the discharge is because of conduct that is protected by law. If there is increased risk of a lawsuit because of the proximity between an employee's protected conduct and the termination, it is more important than ever that you have taken precautions before the termination.

Treat Employees With Respect At All Times, But Especially on the Way Out
Terminations are difficult for everyone, but employees who are treated with respect are less motivated to find a reason to sue you. Unless you have a strong reason, such as employee theft or sabotage, it's perfectly appropriate to allow employees to collect their things, to say goodbye to co-workers, and to generally exit the workplace with dignity.

Carefully Plan and Document A Reduction in Force
A Reduction in Force (“RIF”) must be planned in advance with careful attention paid to the selection process. Employer engaging in this process should review layoff policies, identify criteria for layoff (i.e. by position or by employee), document criteria, and carefully select employees. It is also very important to document the selection process and to be able to articulate why a particular employee was selected. Lastly, keep in mind there may be some legal requirements applicable to a RIF, such as the Worker Adjustment Retraining and Notification Act, the Older Workers Benefit and Protection Act if you offer severance pay, and state law requirements.

All employers face some legal risk when terminating employees. Nonetheless, you can take proactive steps to minimize the risks you face, and to place your organization in the best position possible when it comes to defending a lawsuit. As many have said before, “an ounce of prevention is worth a pound of cure” and this is certainly true in employment law.

Recent Developments

The rumors of the FDIC “locking down” banks from brokered deposits are true. Here is how it happens. If you are not “well capitalized,” then under Prompt Corrective Action (“PCA”) (a leftover piece of legislative shrapnel from the thrift bailout 20 years ago), you are precluded from accepting or renewing any brokered deposits without receiving a waiver from the FDIC, which is rarely forthcoming and is granted only under limited circumstances. Paying more than 75 basis points above the average deposit rate in your market will be considered the same as taking a brokered deposit.

You can also find yourself in the same fix if you are rated a composite “4” or “5” bank or have a Cease and Desist Order (“C&D”). In that event, you are deemed to be just adequately capitalized (no matter your level of capital), and are subject to the same PCA brokered deposit restrictions.

The Dilemma

If you fall below “well capitalized” or are rated a “4” or “5” bank or get a C&D, you are effectively locked out of taking brokered deposits. If brokered deposits are a critical source of your funding, you could actually expire from a lack of liquidity, like WaMu and Bank of Clark County, even if you have adequate capital. In fact, you technically could be well capitalized and still become illiquid. Again, remember, if you are actually just adequately capitalized or are a “4” or “5” or have a C&D, you cannot even pay a premium for regular deposits in your market above 75 basis points. Further CDARS are also considered brokered deposits, even though they are held by existing customers.

Our discussions with the FDIC suggest that this is a bright line test and that waivers for brokered deposits are the exception (e.g. as a temporary bridge for a sale of the bank). To understand this hard-line approach, you have to realize that the FDIC believes that if a bank fails, the brokered deposits (which the FDIC inherits as a liability) will effectively be a total loss to the deposit insurance fund, based on their past experience. Hence, NO MAS!

What To Do

Clearly, any steps your bank can take now to avoid any of these PCA triggering mechanisms are absolutely critical. We realize that raising capital in today's environment can be challenging, but significant dilution is still better than the alternative. Ultimately, lowering your dependence on brokered deposits would be a good practice. Keep in mind that once you get in trouble, borrowing from the FHLB, the Fed, or bankers' banks becomes increasingly challenging, further drying up your secondary sources of liquidity.

Conclusion

We highly recommend that your bank focuses on this serious, potential liquidity situation and avoids getting yourself in this impossible dilemma. Whether the FDIC will soften its stance as the breadth of this crisis spreads, is hard to determine. Even arguments allowing you to renew or replace brokered deposits solely to support the steady disposal of toxic assets have fallen on unreceptive ears to date. So please be forewarned of the seriousness of this situation.

If you should have any questions or wish to discuss issues specific to your financial institution please contact any of the following members of the Graham and Dunn Financial Services Team:

Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com),
Kumi Yamamoto Baruffi (206.340.9676 or kbaruffi@grahamdunn.com),
Casey M. Nault (206.340.4808 or cnault@grahamdunn.com),
or Jane H. Kaufman (206.340.9663 or jkaufman@grahamdunn.com).

Yesterday, our client, Glacier Bancorp (Nasdaq: GBCI), headquartered in Kalispell, MT, announced a merger agreement whereby First National Bank & Trust, located in Powell, Wyoming, would become the newest member of the Glacier family of banks, in a combination stock and cash deal valued at $17.5 million. At December 31, 2008, First National Bank & Trust had $282 million and Glacier had $5.6 billion in total assets, respectively. Click here to see the news release announcing the transaction.

This transaction is Glacier's second foray into Wyoming and continues to broaden its footprint in the Rocky Mountain states. This acquisition reflects Glacier's continuing ability to add independent banks with seasoned management teams, even in today's challenging deal environment, by using its strong stock currency and capital position as consideration.

We would be pleased to discuss your comments and questions about this transaction and its implications for your institution and the industry in general.

For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) or Kumi Yamamoto Baruffi (206.340.9676 or kbaruffi@grahamdunn.com).

Introduction

Each year there are a number of important disclosure considerations for companies that file Annual Reports on Form 10-K under Securities and Exchange Commission (SEC) rules. These considerations have come into greater focus for the 2009 year-end reporting season given the severe challenges facing many companies in this extraordinarily difficult economic environment. The best way to communicate transparently with investors and protect your company during these uncertain and litigious times is to prepare a thorough and thoughtful 10-K Report with particular focus on the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Risk Factors sections.

Perhaps more than any other year in recent memory, this year special attention should be paid to MD&A and Risk Factors. In particular, we encourage 10-K drafters to undertake a fresh review of the SEC's interpretive releases on MD&A from May 1989, January 2002 and December 2003 (the “1989 Release”, “2002 Release” and “2003 Release”). The theme “looking through the eyes of management” may never have been more spot on than now. Drafters may find guidance in the prior releases that may be particularly relevant in the current economic crisis.

When preparing MD&A, companies should be mindful of the following:

• Overview. Most companies have taken the SEC's cue in the 2003 Release to include an overview or introductory section, as a means of fulfilling the key MD&A objective of providing a narrative explanation of the financial statements and a discussion of the business that enables investors to see the company through the eyes of management. This year perhaps more than ever, care should be taken to provide an overview that gives investors a frank assessment of the company's results and the road ahead.
• Not Just a “Mark-Up”. Senior SEC Staff have frequently reminded issuers that each year's MD&A, and particularly the overview, should not be simply a mark-up of the prior year's disclosure. The current environment in particular underscores the need for companies to take a fresh approach to the overview section, discussing the particular impacts of the current environment on the company's business and financial results. MD&A drafters would be well advised to begin the process of drafting the overview by sitting down with executive management and asking them how they would describe the company's results, challenges and prospects to a new board member or potential investor.
• Forward-Looking Disclosure May Be Mandatory. Executives and MD&A drafters should be mindful that forward-looking disclosure is not always optional. Disclosure is mandatory where there is a known trend or uncertainty that is reasonably likely to have a material effect on the company's financial condition or results of operations.
• Liquidity and Capital Resources. For many companies, this year's discussion of liquidity and capital resources will differ significantly from prior year disclosures, and even from the last quarter's Form 10-Q discussion. Among other issues, MD&A drafters should consider whether any known trends exist with respect to the company's debt instruments and facilities. For example, if current modeling shows a trend toward breach of a financial covenant or the failure to maintain ratings necessary to access debt facilities the company has traditionally relied upon, the company will need to consider appropriate disclosure related to the trend, steps the company is taking in response, its likely effects and whether any alternative sources of funding are available. As another example, companies with maturing debt instruments or facilities should consider appropriate disclosure regarding the expected cost and availability of replacement financing, if material. For the first time in recent memory, liquidity has become a widespread concern for many financial institutions and should receive appropriate and prominent disclosure in your MD&A, as well as Risk Factors, if applicable.
• Sources of Possible MD&A Disclosure. As part of sound disclosure controls and procedures, companies should ensure that material information, particularly forward-looking, that is shared internally among executives and the board of directors is considered for possible MD&A disclosure. In one prominent enforcement action, the SEC based its conclusion that material information had been omitted from MD&A in part on the fact that the matter was specifically brought to the attention of the company's board in meeting materials and was the subject of significant board discussion and concern.
• Update Forward-Looking Statement Paragraph. Companies should consider whether the risks and uncertainties noted in their cautionary statement regarding the use of forward-looking statements should be updated and re-ordered. The safe harbor applicable to forward-looking statements provides the greatest protection when the risks and uncertainties noted are as current as possible and correspond to the forward-looking statements actually included in the report. Accordingly, updating this language could be critical in protecting the company against future claims based on forward-looking statements.

When preparing Risk Factors, companies should be mindful of the following:

• Focus on Particular Risks to the Company. The current economic environment clearly presents a heightened risk profile for many if not all companies. The most effective risk factors will discuss the specific material risks to the company and its stock and bondholders, rather than simply discuss the current challenging economic conditions without explaining exactly how they translate into specific risks for the company. In other words, generic or industry risks may not be enough.
• Focus on Differential Risks to Stock and Bondholders. For companies with both publicly-traded stock and bonds, particular care should be taken to ensure that any differential impacts on stock and bondholders of material risks facing the company are discussed.

Copies of the SEC's 2003 Release, 2002 Release and 1989 Release can be found on the Commission's Web site here, here and here, respectively.

Conclusion

We hope this alert will help you in preparing your upcoming Form 10-K. Please feel free to contact your usual contact at Graham & Dunn, or Casey M. Nault (206.903.4808 or cnault@grahamdunn.com), Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com), or Bart E. Bartholdt (206.340.9647 or bbartholdt@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.

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The forces of globalization continue to change our world, and with it the hotel industry.  In response, U.S. hotel developers, brand owners, and investors have continued to accelerate their efforts to extend their reach across borders and apply their skills in new, international markets.  As U.S. markets contract in the current, ongoing recession, the effort to reach new markets has become even more urgent.

Experienced hotel counselors have special industry knowledge and legal skills to help developers in the complex process of acquiring, developing, and stabilizing hotel projects.  As hotel clients cross borders, the U.S. lawyer faces a new set of challenges.
This article provides an approach to international hotel projects to allow both hotel companies and their counselors to understand the big-picture risks and objectives and to apply their skills without exceeding their limitations.  By approaching international hotel projects intelligently, the complexity, costs and risks can be reduced.

1. How Much Foreign Law Will You Need?
   
   All international hotel projects are not alike.   Some are more affected by the law of the foreign jurisdiction than others.  For example, an ordinary hotel franchise agreement that is governed by U.S. law and that has a strong arbitration clause may require little application of foreign law.  In contrast, a co-investment in foreign real property by citizens and entities of multiple countries will require extensive application of foreign law.
   
   Accordingly, the first step in approaching the international project is to inventory and understand the objectives of the legal documents and relationships.  To do this, it is important to bring back from the subconscious essential concepts that experienced lawyers take for granted in a domestic deal. 
   
   For example, when we enter into a contract, such as a hotel management agreement or franchise agreement, our ultimate objectives are usually the following:
   
   • We want the parties to understand and accept their promises.
   • If the other side breaches, usually we want to be able to take legal action in pursuit of damages or other bargained-for remedies.
   • We then want to be able to get to judgment, enter the judgment in appropriate jurisdictions, enforce the judgment, and collect.
   
   In contrast to the objectives in creating simple, contractual relationship, if we are investing in real estate, our ultimate objectives include the following:
   
   • We want to “own” the property and understand what the normal attributes of ownership are.
   • We want to know how to establish and protect our “ownership.”
   • We want to know what we have to do, legally and practically, to accomplish our development objectives.
   • We want to know how we will be able to protect our interests if things do not go according to plan.
     
   Hotel projects can involve dozens of different kinds of legal relationships and transactions.  In each relationship, the U.S. lawyer should bring to top-of-mind these basic objectives and fundamentals.  In contrast to a domestic deal, the U.S. lawyer must realize that these fundamentals cannot be assumed and will require specific attention.  Then the lawyer can begin to understand how deeply the lawyer will need to delve into foreign law and foreign issues to accomplish the expected results and have recourse to the expected remedies.
   
2. Arbitration:  The Most Important Cleavage Point for Drafting Contracts.
   
   In any contract, the most essential, ultimate legal concern is enforcement.  A contract accomplishes little if it cannot be enforced according to the parties' expectations.
   
   f the parties do not effectively establish the law and forum for enforcing the contract, then the possibility remains that a foreign court will be involved.  And if a foreign court will be involved, then local procedural or substantive law might govern the contract and what it means.  And if the foreign courts might decide those critical matters, then the deal lawyer will have to start from scratch in drafting the contracts so they conform to local law and can be enforced under it.  This slippery slope leads to very large local and U.S. legal bills.
   
   The answer usually does not lie in specifying venue in U.S. courts.  In general, courts in every country do not give much weight to the judgments entered by the courts of other countries.  This is even the case when, for example, a party attempts to enter and enforce in Canada a judgment obtained in a U.S. court.  Very often, the foreign court will reopen the facts and a new mini-trial or a retrial may occur.  This risk then leads back to the slippery slope.
   
   The answer usually does lie in arbitration.  Interestingly, although countries seldom give much deference to foreign courts' decisions, virtually all countries must give great deference to arbitration awards.  This is because most countries are bound by one or more treaties that require it.  More than 120 countries are now parties to the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), 21 U.S.T. 2517 (1958).   These countries include, for example, Mexico, Canada, and the Peoples Republic of China.   A few South American countries that are not parties to the New York Convention are parties to the similar Inter-American Convention on International Commercial Arbitration, 14 I.L.M. 336 (1975), which the U.S. has also ratified. 
   
   These two treaties (the “Arbitration Enforcement Treaties”) are pivotal.  They allow the parties to effectively choose the applicable law, the venue, the trier of fact, and the procedures for the hearing process.  Then, when the arbitrator's judgment is obtained, the foreign court must enter and recognize the judgment as the equivalent of a final judgment in the foreign court.  The only exceptions to the obligation to do so are narrow defenses based on gross abuses of procedural rights or violation of public policy.
   


3. Making Choices About Arbitration:  Selecting the Arbitrator, Governing Law, and Venue.
   
   Even though the Arbitration Enforcement Treaties provide for only narrow defenses to recognition, those narrow defenses do exist.  Accordingly, a primary consideration in choosing the arbitrator, the governing law, and the venue is whether the choices will help steer clear of those narrow defenses.  A secondary consideration is the impact these choices will have on the objective of diminishing involvement of foreign law and foreign lawyers in the negotiation and documentation of the deal.
   
   
   1. Choosing the Arbitration Service. 
      An arbitration provision can call for arbitration with the assistance of an international arbitration organization.  This kind of arbitration is often called an administered arbitration.  Alternatively, the provision can identify a specific, independent arbitrator (often called an ad hoc arbitrator or a non-administered arbitration). 
      
      One of the defenses under the Arbitration Enforcement Treaties is that “the recognition or enforcement of the award would be contrary to the public policy of” the country where recognition is sought.  Another defense is that “the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties.”
      
      These defenses suggest that the U.S. lawyer should make all aspects of the arbitration procedure as mainstream as possible.  Also, the lawyer should ensure that the arbitration service has a good deal of international arbitration experience.  By doing so, one can expect to reduce the risks that the procedure or the arbitrator will inadvertently trigger defenses under the Arbitration Enforcement Treaties. 
      
      The leading international arbitration organizations are:
      
      • The International Chamber of Commerce's Court of International Arbitration (ICC).  It is based in Paris but administers proceedings worldwide, with Switzerland being a particularly important site.
      • The American Arbitration Association.  Its International Center is based in New York, but it operates nationwide.
      • The LCIA Court of International Arbitration in London.  It is active in England and elsewhere, primarily in Commonwealth countries.
      • The International Centre for the Settlement of Investment Disputes (ICSID).  It is operated by the World Bank and is a specialized arbitration organization for disputes in transactions between private investors and foreign governments.
      
      All of these organizations have generally similar rules, typically available on their web sites.  They also all provide basically equivalent types of services.
      
      If an ad hoc or nonadministered arbitration process is chosen, then the arbitration clause will have to specify a governing set of rules.   The most commonly used rules in nonadministered arbitration are those published by the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules.
      
      
      • Choosing the Governing Law. 
        Of course, any U.S. lawyer will want U.S. law to apply and, ideally, the law of the State in which the lawyer practices.  The closer to home the lawyer can keep the governing law, the less advice will be needed to make sure the laws of an unfamiliar jurisdiction will not unexpectedly override the intentions and expectations of the parties. 
        
        Also, one of the defenses to enforcement under the Arbitration Enforcement Treaties is that the parties' agreement “is not valid under the law to which the parties have subjected it.”  To the extent that the applicable law is familiar and accessible to the U.S. lawyer, the lawyer can more easily reach comfort that the agreement is valid under the applicable law and that an arbitration award based on the agreement will be enforceable under the Arbitration Enforcement Treaties.
        
        If, despite the U.S. lawyer's best efforts, the parties' negotiations lead them away from U.S. law, then normally a U.S. lawyer should fight hard to make sure the foreign law is based on common law and not civil law.
        
        The law in the U.S. and all its States (other than Louisiana) is based on common law.  Courts are responsible for creating and applying case law and resolving most civil disputes.  The system is borrowed, essentially, from English common law.  Many other countries around the world have also borrowed this system.  It is remarkable how similarly contractual issues and enforcement are handled in common law jurisdictions.  The familiarity and similarities help diminish the amount of foreign law advice and contractual modifications needed to make sure the documents do what they are supposed to do.
        
        The civil law system, in contrast, is based on the Napoleonic Code.  Under this system, almost everything that a U.S. lawyer knows is wrong.  If the governing laws are those of a civil law country, then foreign lawyers will need to be heavily involved, and the documents will need significant modification in form and substance to make sure they are enforceable and fulfill the parties' expectations.
      
      
      • Choosing the Venue.
        The New York Convention states that a country ratifying the Convention may “declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State.”  As a result, it is important that venue selected is in a country that is a party to the Convention.
        
        Also, one might reasonably conclude that arbitrators who are in, or close to, the governing law jurisdiction might have more experience with and knowledge about the governing law.  This experience and knowledge should help reduce costs and the chances of an aberrant ruling.  Accordingly, it is logical to select a venue that correlates to the governing law.
      
      
      • Other Choices.
        Sample arbitration clauses can be obtained from the websites of the leading arbitration organizations mentioned above, as well as UNCITRAL.  These clauses will help identify other choices.
        
        The choices will include, for example, the identification of the language to be used in the proceedings.  They also may suggest mediation as a step before arbitration.  The considerations in making these choices are rather obvious or are no different than those involved in usual, domestic transactions.
   
   
4. Considerations When Foreign Property Investments are Involved.
   
   If the international hotel project will involve the client in foreign ownership, then the lawyer and client will, by necessity, need to become heavily involved in local law.  Local counsel will be required and will be an essential part of the team.  The U.S. lawyer will need to apply all of his “issue spotting” skills and his/her ability to “think like a lawyer” to ferret out and understand the areas where local law impacts the client's normal expectations, and then the lawyer will need to skillfully communicate those variances and risks to the client.
   
   Even when ownership of foreign real estate is an essential part of the client's rights and expectations, however, the lawyer still can and should work to structure the deal so that application of foreign law will be minimized. 
   
   If, for example, multiple parties will have interests in the real estate, a single entity can be created to own the property.  Then, a separate entity can be created in a familiar jurisdiction under familiar laws.  The deal between the parties can then reside primarily in the documents governing that entity.  The documents can include an effective arbitration clause that follows the suggestions set forth in previous sections of this part II.  Obviously, tax considerations, the laws of the foreign jurisdiction, and the parties' expectations will affect the structure.  But the impact of foreign law can be minimized and costs and complexity can be reduced by isolating the real estate issues and then building the deal points into separate entities governed by familiar structures, documentation, and enforcement mechanisms.
   
   
5. Selecting And Working With Foreign Counsel.

Once the U.S. lawyer has taken inventory the objectives of the legal documents and relationships and has determined how much foreign law and lawyering will be needed, the U.S. lawyer must then select foreign counsel. 

As suggested above, every international hotel deal will have some foreign law to consider.  At a minimum, local counsel is usually needed to help evaluate and anticipate circumstances that could trigger enforcement defenses under the Arbitration Enforcement Treaties.  And if, for example, the U.S. party's main recourse upon a breach is to arbitrate to judgment, enter the judgment in the foreign jurisdiction, and execute on foreign assets, then the U.S. lawyer likely will need to learn from local counsel how effective that execution process will be and then steer the transaction to accommodate those considerations. 

At the other end of the spectrum, the project may involve acquisition and development of foreign real estate.  Then, local counsel will be an essential part of the team, as heavily involved as the local real estate/land use/construction lawyer in a domestic development project.

The choice of foreign counsel should be made with full understanding of these needs and roles.  Then, a number of considerations may weighed.


1. Factors in Selecting Foreign Counsel.

First, the U.S. lawyer should understand what kind of lawyers are available in the foreign jurisdiction and what they do.  In common law countries, one can expect barristers and solicitors.  They often have different roles and capacities.  In civil law countries, the notary is a distinct legal profession and may be required.   The U.S. lawyer may also encounter a “foreign legal consultant (FLC).  The FLC may not, for example, be permitted to advise on purely local-law matters.  If the U.S. lawyer is not aware of these limitations, the employment of the FLC may unknowingly build in an extra layer of expense.

Next, the U.S. lawyer can tap a number of sources to create a list of potential foreign counsel choices.  Personal experience and trust with the foreign lawyer is, of course, very useful.  One normally also seeks out recommendations from other lawyers, law firms, and other professionals whom the U.S. lawyer knows and trusts.  Research and verification on the Internet has its usual role, as well.

Once a list of potential foreign counsel has been compiled, U.S. counsel should contact and talk with each of them.  The process of coming to a final selection is essentially the same as the process of selecting local counsel in a domestic transaction. 

Ask:

• What skills and experience are needed for the engagement?
• Does the candidate have those skills?
• Does the candidate have a good reputation for honesty, service and integrity?  Does the candidate reflect these attributes in his contacts with you?
• Can you communicate with the candidate easily and without waste of time?
• Do you feel a comfortable connection with the way the candidate behaves and thinks?
• Do you believe that the candidate will be a team player?  Or do you sense the candidate be or driven by personal gain, fee generation, and ego?
• Will the candidate be able to work well with those he or she will needs to work with?
• Does the candidate have the technology needed to communicate effectively and accomplish the work?
• Are the fees and rates reasonable?


2. Special Factors and Hazards.
   
   U.S. lawyers take for granted and expect behavior and conduct mandated by ethical rules applicable to U.S. lawyers.  Do not assume that they apply in the foreign country. 
   For example, the foreign jurisdiction might not require that the lawyer treat your communications as confidential and privileged.  Obviously, if the project is not publically announced and confidentiality is important, the failure to recognize the absence of these protections can have grave consequences.
   
   Similarly, the foreign jurisdiction may not protect against conflicts of interest.  It is very annoying to hire a local lawyer only to find that he has a personal interest diametrically opposed to the client's objectives and is actively pursuing them to the client's detriment.
   


3. The Engagement Letter.
   
   As indicated above, the ethical rules, expectations, norms, and customs applicable in a foreign legal engagement may not line up with our normal expectations.  The engagement letter is a key document to help bring these expectations in line. 
   
   In addition to the usual terms of a typical engagement letter, the letter can provide for confidentiality, protections against conflicts of interest, provisions about service expectations and deadlines, billing expectations, and specific terms about the opinions or other work product expected from the foreign lawyer.  If these terms are critical, consider the advantages of employing arbitration provisions, as discussed earlier in this Section II.

Globalization will continue, both in good times and in times of recession and crisis.  To survive, hotel developers, brand owners, and investors will continue their efforts to access new, international markets. The need to approach the international hotel project intelligently has never been more important.  By understanding how much foreign law will be needed, taking full advantage of the Arbitration Enforcement Treaties, making the right choices on enforcement issues and structuring, and carefully considering and selecting foreign counsel, hotel industry stakeholders and their counsel will accomplish their objectives with reduced complexity and with increased success.

Responding to the impact of the financial crisis on the hotel industry, Graham & Dunn's Hospitality Industry Group has formed a Hotel Asset Resolution Task Force. The Task Force is an interdisciplinary team with the specialized legal and industry skills, experience, and resources to meet the needs of clients who own, hold, manage, or will take control of troubled hotel assets. The Task Force will assist hotel owners, lenders, special servicers, their asset management firms, and other stakeholders with the restructuring of hotel loans and the positioning, transition, and disposition of distressed or foreclosed hotel assets. The Task Force will also assist new investors seeking to acquire and reposition troubled hotel assets in anticipation of the eventual recovery.

The hotel industry is bracing for a predicted RevPar decline of 7.8% nationwide in 2009. Because the still-unfolding economic downturn has no recent historical equivalent, even this projection may be understated, and certain markets will certainly suffer greater damage than the nationwide average. The declines, combined with increasing cap rates, will result in a substantial reduction in the value of hotel assets. Leveraged hotels will face difficulty meeting debt service, and a significant percentage of all hotels will fail to satisfy debt ratio requirements and other loan covenants. Hotel owners with significant equity still at risk will need to employ a coherent strategy to protect their investments. Lenders, special servicers, and other stakeholders will need to do the same, and, if they inherit and assume direct responsibility for hotel assets, they will need to stabilize, manage, and market these complex businesses. New investors will need to exercise intelligence and diligence to navigate the hotel industry, make good choices, and avoid dangers as they seek to acquire and turn around troubled hotel assets.

Owners' Challenges

Hotel owners must take a hard look at their hotel assets and determine the effect of a substantial decline in RevPar and an increase in cap rates. They need to assess whether they potentially face monetary loan defaults. They also need to carefully evaluate their loan documents and determine whether there is a risk that their hotels may fail to satisfy debt coverage ratios or other loan covenants. In either event, they need assistance in establishing a business and legal strategy to protect their equity.

If defaults must be cured, or even if, more simply, loan renewal dates are imminent, owners need to understand the new realities of the lending environment. In many cases, an influx of significant new equity will be needed to protect existing investments, and owners need assistance to understand and access new sources of equity in the troubled national and global environment.

Owners also need to understand available legal rights and remedies, including insolvency laws, correctly weigh them, and, if necessary, pursue them.

Challenges facing Hotel Lenders and Investors

If, because of the declines in values and performance, a hotel owner's equity must be considered lost, or if the owner is unable to access new sources of equity or debt, then the hotel's lenders or investors will themselves need to assert control over the hotel.

Hotels are complicated assets in almost all respects. Without access to industry knowledge and experience, these new owners have little hope of achieving satisfactory results. To adequately exert control and then stabilize, manage, and market these assets, lenders and investors will need the assistance of legal and other advisors who know the hotel industry, are experienced with all aspects of hotels, can apply this industry, legal, and business knowledge for best advantage.

• Dealing with Partially Completed Hotel Projects. In some cases, a hotel project may be in a state of partial completion at the time of foreclosure. To determine forward progress to proceed, the foreclosing lender, special servicer, or investor will need to confront and understand the hotel's specific entitlements and structure. If a decision to complete the project is made, then doing so will also often require the settlement of lien claims, enforcement of warranties, and many other construction issues.
  
• Repositioning and Maximizing Realization of Operating Hotels. Other distressed hotels may be completed and operating, but may be performing poorly. The stakeholder considering foreclosure will need to address decisions and issues that are unique to the hotel business. Before foreclosure, the stakeholder will need to be fully aware of the unique aspects of the hotel business, including such things as the need to transfer the hotel's liquor licenses and the specialized state and local disclosure and licensing laws that must be addressed and satisfied. The use of receivership laws must be considered and understood, and, if this route is selected, a qualified, industry-experienced receiver must be engaged and authorized by court order that is informed by both legal and hotel-specific knowledge. The stakeholder will need to analyze the terms of any branded management contract, the relationship with the branded management company, the ability to change brands and the effect of doing so, the hotel's operating budget, and scheduled capital expenditures. The stakeholder will then need to position the hotel for a satisfactory disposition. All of these steps will require specialized, hotel-specific legal and business knowledge and access to resources in the hotel industry.
  
• Addressing Legal Risks of Hotel Operations. Stakeholders who lack hands-on hotel experience will face a number of legal issues they are not accustomed to addressing. These may include employment and union problems and issues, environmental law risks, specialized hotel contracts such as group contracts, intellectual property and e-commerce concerns, and litigation relating to guests, tenants, or contractor agreements.
  
• Handling Unique, Multi-faceted Hotel Assets. The foreclosing lenders, special servicers, or investors may also confront complex hotel assets, such as condo hotels. Condo hotels trigger special risks. See Trouble Condo Hotel Workouts – The Time Has Arrived. For example, if the foreclosing lender sells a condo hotel unit without following specific, well-considered procedures, the foreclosing lender may inadvertently violate federal or state securities laws.

Concerns for Branded Management Companies

Branded management companies' most valued assets are their portfolios of long-term, branded management contracts.

Managers must analyze their performance clauses to see if their contracts are at risk. They also need to review their Subordination and Nondisturbance Agreements (SNDA) to see what rights they have if a loan default occurs and the lender begins foreclosure. If the SNDA was not well-negotiated, the branded management company may have trouble accessing the hotel's revenues to meet payroll or perform brand-mandated capital improvements.

Branded managers need assistance in this analysis as well as experienced counsel to anticipate and address risks both inside and outside of receivership and bankruptcy.

Challenges for New Investors

In this diverse, complex global economy, there are those who are looking to invest. These investors will help initiate the economy's recovery by providing owners with equity or liquidity and allowing lenders to move assets off their books. These new investors include private equity sources (both foreign and U.S.). Also, pension and other equity funds will be in the process of revaluing their real estate portfolios. When that has occurred, they will need to rebalance their portfolios and, once again, will need to invest in real estate.

Real estate investors who become interested in hotels quickly learn that special, industry knowledge and skills are required to avoid costly investment and operational errors. Complexity and risks are multiplied in a troubled environment.

Special skills are required to determine which hotel assets are troubled because of the current economic environment and which will be troubled even when the environment improves. Once the good assets are identified, investors must adeptly handle a very broad range of industry-specific issues. These include the special due diligence and legal concerns of hotel acquisitions. In addition, the investor must understand how to handle multiple liens and claimholders and, potentially, receivership or bankruptcy procedures. Simultaneously, the investor needs to engage the industry resources to establish and execute the strategy to reposition the hotel assets and minimize losses while the recovery takes hold.

Meeting the Needs

To help clients successfully address these challenges, the Task Force employs Graham & Dunn's nationally recognized Hospitality Industry Group. Its members have assisted the industry since 1990, and, in previous down-cycles, have successfully addressed the very legal issues and challenges facing the industry today. The Task Force is further enhanced and combined with the extensive banking industry resources of Graham & Dunn's Financial Services Group and the firm's bankruptcy/insolvency, real estate, labor and employment, litigation, and construction practices.

The Hotel Resolution Task Force is led by Hospitality Industry Group partners Irvin W. Sandman and Russell C. Savrann, in close coordination with Financial Services Group and bankruptcy partner Mark D. Northrup, Real Estate Group partner Douglas J. Smart, and litigation partners Doug Berry, Stephen H. Goodman and Steven A. Miller.

The Task Force will also provide clients advice about, and access to, the Hospitality Industry Group's wide-ranging contacts and resources in the hotel industry. These resources include, among many others, the advisory, economic, and disposition services of CBRE Hotels, the real estate services of Graham & Dunn affiliate Orion Real Estate Advisors, and companies that can assist with a broad range of segments and brands, including independent hotel management companies such as MTM Luxury Lodging, Coastal Hotel Group, The Dow Hotel Company, Northview Hotel Group, and Hay Creek Hospitality.

The Beat Goes On

Well, as Yogi Berra said, “it ain't over 'til it's over.” Just when the stock market started to show some signs of recovery and the TARP funds had been spread among the banks, auto industry and GMAC, things turned south again. The news that Bank of America is back to the TARP trough to support its acquisition of Merrill Lynch and Citicorp's plan to sell off up to a third of its assets has the financial markets in a downward spiral.

The TARP Conundrum

A number of our clients determined not to take the TARP because of concerns about the government's ability to change the rules of the game after the fact. It appears that they are right. So, while if you needed the TARP and could qualify, it still may have been the best course of action, if you didn't need it, you avoided the uncertain aftermath we are starting to experience. The disconnect between Congress, the Treasury and the federal banking agencies is enormous. Congress thinks the TARP should be put out in loans, while the Treasury and the agencies view it as a vehicle for relatively healthy banks to bail out the weaker banks and save the FDIC insurance fund.

The Regulatory Environment

In my 35 years as a regulator and lawyer, I have never seen an environment with so little room for tolerance or negotiation with the regulators. Exams are harsh, offsite temporary CAMELS rating downgrades have become common, single and double exam rating downgrades and enforcement actions have become the norm. It appears if you get in trouble, you basically are in a box – a “3” rating = a Memo of Understanding and a “4” rating = a Cease and Desist Order – PERIOD! Concentrations in construction lending and brokered certificates of deposits are two of the biggest regulatory hot buttons.

The Liquidity Crisis

Funding has been an evolving challenge for banks over the last couple of years. Now funding and liquidity have come to the forefront. If you get in trouble, the regulators (primarily the FDIC) may curtail your future access to brokered certificates of deposit. If they view the bank at risk, they will not allow you to renew or replace these CDs. Remember, the FDIC is an insurance agency. They feel that brokered CDs devalue a franchise in liquidation and garner no premium at the time of sale or liquidation. Also, the FHLB may require you to collateralize funding lines with qualifying assets. With interbank funding all but dried up, this can cause enormous liquidity pressure on some banks. This is the very issue that hastened WAMU's demise. Further, we are aware of weekly and even daily liquidity reports being required by the FDIC in a number of situations with viable banks.

The Broader Economic Solution

It seems the key for our economic turnaround is to stop the downturn as quickly as possible. With consumers tapped out, many businesses struggling and banks reluctant to lend into this mess, a government guaranteed lending program seems to be the best solution. Realistically, we (the U.S. taxpayers) will pay for the recovery anyway. So why not stop the bleeding and inject funding into the economy sooner rather than later? The longer the recession, the deeper the hole we will have to dig ourselves out of and the longer and more painful the recovery. Think of this as laparoscopic surgery v. more invasive traditional surgery. The less intrusive, the faster the recovery. So, if the government can fashion such a program, encouraging the banks to lend, while streamlining the normal bureaucratic process, we could start to turn our economy around more quickly.

Management and Board Challenge

Our visits with management teams and Boards of Directors throughout the West reveal the stress of the most uncertain economic environment of our lifetimes. Boards and management must stay well-informed, be proactive and focus on Asset Quality, Capital and Liquidity. Many of our clients view 2009 as a year of survival and recovery. Maintaining a good dialogue with your regulators, shareholders and investment community and a healthy relationship with your regulators is paramount in these times.

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Business method patents will not likely be quite as in vogue and the ramifications are sure to be far reaching in view of the long-awaited decision of In re Bilski handed down by the Federal Circuit Court of Appeals in a full court decision in late October [Case No. 2007-1130 (en banc) Fed. Cir. October 30, 2008]. While the decision did not prohibit business method patents, a new threshold test was created for what is patentable subject matter under 35 U.S.C. 101.

Process patents (claims of a patent that are a mere process, as opposed to being an apparatus, a method of manufacture, or a composition of matter) must now meet a new test of “being a machine (or tied to a machine) or transform an article.” This new “machine or transformation” test is the only one allowed for determining if a process claim meets statutory utility requirements of 35 U.S.C. 101 and overturns the old “useful, concrete and tangible result” test announced in the ten-year old landmark State Street Bank case that is widely credited for allowing business methods as patentable subject matter. The problem is that ten years worth of business method patents were allowed and issued under the old test. Thus, there is a cloud on many thousands of patents, particularly in the financial services industry. Further, the Federal Circuit did not clarify what is a “machine (or how claims are tied to a machine)” or what constitutes “transformation of an article.” For better or worse, this area will now be fairly unsettled and not likely to be clarified for several years.

It helps to give this case some context. The claims at issue were rejected by the U.S. Patent Office, affirmed by the Board of Patent Appeals and Interferences, and now affirmed by the Federal Circuit. The claims of the Bilski patent application were directed to a method of hedging risk in the field of commodities trading. Claim 1 read:

A method of managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

To say that the decision as to what is patentable subject matter has ramifications beyond the general patent bar is an understatement. This is best exemplified by the fact that there were scores of amicus briefs filed in this case, many of which were filed by financial services industries (e.g., Bank of America, American Express Company) and from the accounting/consulting industries (e.g., American Institute of Certified Public Accountants, Accenture). Of peculiar interest, even the ACLU filed an amicus brief in the Bilski case.

So what are the practical ramifications of this important case?

1. Litigation will increase: validity challenges will abound
First, no patent has been invalidated by this action alone. Patents still carry the presumption of validity unless the Director of the U.S. Patent and Trademark Office determines to reexamine select patents on his own. However, let us not kid ourselves; business method patents that do not meet the new “machine or transformation” test are subject to a relatively easy challenge. Therefore, patent challenges for process claims using the old test should be anticipated.

2. Patent owners need to re-evaluate their patent portfolio
Patent owners will want to carefully review patents in their portfolio regarding process claims. If the claims were allowed under the old “useful, concrete and tangible result” test and do not meet the “machine or transformation” test (as best as we can interpret them), the patent owner should look carefully at whether a reissue application can be filed to put the claims into condition under the new “machine or transformation” test.

3. Patent applicants/assignees need to analyze the claims of their existing applications
If a process method claim of a patent application is still pending, the patent applicant/assignee needs to review the claim and determine if the claim is sufficiently tied to a machine, such as a computer (not merely capable of functioning through a computer), or is sufficiently transforming (data can still be transformed, however it is still an open question to what extent transformation takes place). If not, the claim needs to be amended to meet the test as currently understood. Since there is quite a bit of clarification expected over time, the patent applicant/assignee may want to consider letting the application stay in the examination process as long as possible in order to let the clarification process take its natural course and amend any claims in view of those clarifications, as needed.

4. Patent licensees need to be proactive
Licensees will need to review the claims of a licensed patent to determine if the license is still warranted. Although a patent is still valid until a court determines that its claims are invalid, a patent owner may come to the same conclusion that its patent is at risk and renegotiate new terms. In any event, a licensee of process claims may find itself with added leverage to negotiate more favorable terms or to challenge the validity of the licensed patent altogether.

5. Businesses may need to revalue its intellectual assets
Businesses that own business method patents as part of its intangible assets may find themselves with now unenforceable patents (assuming that the reissue process is not an option) or at least gutted patents. Therefore, those assets may be of less value or possibly even worthless. If a business is a publicly-traded company, it may need to restate its financial reports.

6. Due diligence in deals require a heightened scrutiny
Both sides of a deal may need to conduct additional due diligence in view of this decision. especially if business methods patents are the main intellectual property that forms the foundation of the deal.

7. Investors may be more wary
Investors may believe that they have less secured collateral in an emerging company's business plan that relies heavily on business method patents or business method inventions. If so, investor capital availability may be impacted.

8. Will the Supreme Court grant review?
It is likely that the Supreme Court will grant review on this case. The ultimate outcome in the Bilski application is not likely to change (those hedge fund method claims will likely remain unallowable subject matter if nothing else because they are based on abstract ideas). But I believe that the Supreme Court will want to grant review given the high stakes at issue, even though the Federal Circuit gave great deference to prior Supreme Court decisions discussing utility and the statutory meaning of 35 U.S.C. 101. We live in changing times and our country is no longer based on a manufacturing-based economy, but a service and electronic information-based economy. The U.S. has held a place of primacy in the world, in part, based on its strong patent laws. The rigidity of the new “machine or transformation” test is not mandated by Supreme Court precedent. And thousands of “clouded” patents will have a severe impact when the economy is already in crisis.

9. What about Congress making revisions to 101?
While it is possible, I believe that this is unlikely for Congress to amend 101 as there is little consensus from various industry factions. Further, Congress has been unable to make any meaningful changes to the patent act over the last several years due to active lobbying efforts, bigger issues on Congress's plate, and because the courts are willing to tackle this problem head on.

In summary, this decision will have far reaching implications that will impact many businesses, including large, well-established businesses and emerging companies. This is a good time to review those business methods patents and applications in a company's portfolio to see if the new “machine or transformation” test will negatively impact these patents or applications and expose the owner to unexpected validity challenges.

Kathleen T. Petrich is a shareholder at Graham & Dunn and provides strategic IP counseling services to clients in order to protect and enforce their intellectual assets, as well as litigate their interests in those assets. If you have a question about this article or patents/IP in general, please contact her at kpetrich@grahamdunn.com

Ownership of Intellectual Property (IP) is often a critical thing for most employers as they create, catalog, mine, exploit, and enforce their IP assets in an ever-increasingly competitive and global marketplace.  This is particularly true in areas where patents, often the largest sector of IP assets, were not previously allowable subject matter or not common, such as in the financial services industry.  But often ownership concerns are overlooked until a problem is discovered. 

While copyrighted works that are authored by employees are legally “authored” by the employer (thereby fixing the initial ownership issue), there is no such corresponding provision in the patent world for inventions.  Employers do not automatically own inventions that are conceived and reduced to practice when done on company time and within the scope of the employee's employment.  And mere “work for hire” agreements simply have no effect on inventions (unless there are other assignment provisions in the agreement).  This is because patents, at least in the United States, are filed in the name of the inventors or inventors. The inventor or inventors are the original patent owner(s) and unless there is a contractual agreement to transfer the rights to the employer, or the employee fits a narrow “hired to invent” exception, the employer can enjoy at best a “shop right” in the invention.  A shop right is a mere defensive position that allows the employer to use the patented invention royalty free. but it does not convey any ownership rights in the invention and is merely a defense to a claim of infringement.  Ouch!

So how does an employer get an invention that it believes it should have owned in the first place?  Well, if there is no underlying contractual duty to assign that invention to the employer, the employer is going to have to get out its checkbook.  And that can be costly.

What is the best way to handle such issues in the future?
The most proactive and least costly way is to have an employment agreement in place for all new hires.  The employment agreement would have a section regarding IP rights, and particularly, inventions.  The new employee acknowledges up front that in consideration of the new employment, there are certain contractual obligations that the employee must meet.  One such obligation is the duty to assign all inventions that are done on company time and within the scope of the employment to the employer.  Additional IP terms, like keeping trade secrets confidential, and making sure that the duty survives employment termination, are recommended.  Of course, other more traditional employment policy clauses can be (and should be) incorporated into such an agreement.  The primary benefit is that no additional consideration is required at the time of the hire and all IP rights within the scope of the employment are then owned by the employer.

Most states have statutory boundaries to keep employers from overreaching.  In Washington, that provision is RCW 49.44.140 that basically makes unenforceable an employer agreement in which employees are required to turn over invention rights that they invented prior to the employment or did on their own time (e.g., the weekend “garage inventor” normally would be exempted from the employment agreement).

For existing employees, employers are going to need additional consideration of value to claim rights in future work-related inventions.  For legal and practical reasons, the value for existing employees should not be “continued employment.”  While this step of obtaining invention agreements from existing employees can be costly and distracting, it can save untold future headaches by addressing it now.  Further, the additional consideration (the value) at this stage would likely be much lower than the cost required in obtaining an assignment from a balking employee at the patent filing stage.

Graham & Dunn can assist your business in evaluating the best course of action for employee inventions and provide counsel regarding the patent process.  Please contact Kathleen T. Petrich (KPetrich@GrahamDunn.com), Registered Patent Attorney, and April Upchurch Olsen (AOlsen@GrahamDunn.com), who has experience in labor and employment transactional and litigation matters, to see how we can assist you.

What's Next?
One would think that the passage of the Federal Financial “Bailout” Legislation is a foregone conclusion.  However, as we are finalizing this article, the House just shot down the proposal and the U.S. stock market is in a free fall, down 700 points!  Clearly it is not a panacea, but a beginning.  The mechanics of this plan will evolve as it unfolds.  Whether this will do the trick is unknown.  Hopefully, it will serve to stabilize the financial markets and provide some level of confidence to investors and bank customers and encourage banks to start lending again.  Undoubtedly, Secretary Paulson is attempting to apply the lessons learned from Japan's government nonintervention policy.  The key is to put a floor on the real estate market so an economic recovery can begin.

Your Bank
We have been meeting with management and boards of banks throughout the West.  The clear message is to focus on (1) ASSET QUALITY, (2) Liquidity and (3) Capital.  They are all intertwined.  Your ability to sell OREO or negotiate on other troubled loans, in part, will depend on your capital and liquidity positions.  Carefully monitoring and proactively addressing your loan problems is critical.  Many banks have expressed their intention to “de lever” their balance sheets.  Growth no longer is a priority.  Also, positioning for backup funding sources is a critical step in these uncertain times.  Finally, capital is precious and scarce.  So, many banks have determined to preserve capital by reducing or eliminating their cash dividends.  While raising capital is challenging, several banks have pursued various alternatives from offerings to existing shareholders, “friends and family,” and private placements.  Private equity may also be an alternative to consider, albeit an expensive and dilutive one.

The Regulatory Challenge
One can only imagine what the regulators are thinking.  The FDIC over the last week alone had to deal with the failures of the largest thrift and fourth-largest commercial bank in the country.  We are hearing that examinations are harsh, with double downgrades and resulting enforcement actions not uncommon.  Regulatory requests for capital plans abound.  Clearly, it is much better if your bank has addressed this before the regulators visit.  It has to be an overwhelming task for the regulators, given their reduced resources and the breadth of the problems.  It is sort of like trying to contain a California wildfire with the Santa Ana winds blowing.

Your Board
Understandably, Boards of Directors are getting rattled by what they see going on around them.  It is critical that management keeps them informed and explains where things are, the bank's alternatives and recommended course of action.  The use of your outside advisors to guide you through the process and help put things in perspective and stabilize matters is important.  However, ultimately, it is up to management to make the tough decisions and execute whatever strategy is adopted.

The Future
Hopefully, the “bailout” legislation will stop the hemorrhaging, but there still will be bleeding.  It appears that any economic recovery will be an 18 month to two year process.  The universe of banks will shrink.  The fourth quarter results of this year will be telling after the effect of auditors, examiners, lower appraisals on OREO and goodwill write downs are digested.  While things appear grim, your bank must set a course, follow it and be flexible enough to adjust quickly to these uncertain and precarious times.  A good plan and some luck will go a long way to helping you to survive this unprecedented financial crisis.

Introduction
For those of you who follow our Cyber-Grahams, since December we have issued a series of articles on the changing banking world.  Well, we clearly are approaching a turning point with the failure of Freddie Mac and Fannie Mae and its impact on many banks is being felt nationwide, including here in the West.

What's Going On?
Many banks are struggling with credit issues, increasing loan loss reserves, OREO, declining earnings and stock prices, Freddie and Fannie stock investments and the resultant need for more capital.  The bad news is that capital is brutally hard to get, and at what price?

The Regulatory Quandary
The regulators find themselves in an impossible position.  As a former regulator, I can relate to that uncomfortable feeling.  They are concerned about sharply declining real estate values and what that means for banks' loan portfolios.  They don't want to miss anything in their exams, and, for the most part, seem pretty stringent and immovable in their positions.  Hence, exam downgrades and administrative actions abound.

M&A - The Last Man Standing
With the potentially devastating capital impact of the Fannie and Freddie takeover on many banks' investment portfolios, they're now in need of capital or a merger partner.  The capital markets have virtually dried up, and what is available is unbelievably pricey and dilutive.  Deals are almost non-existent as the pool of eligible buyers diminishes daily.

The Solution
The regulators will soon be faced with a choice: do they protect the insurance fund at all costs or do they try to save the banking industry as we know it.  Unless global strategic thinking and reasonable tolerance and forbearance are exercised by the regulators, I think the banking industrycould be in jeopardy.  Clearly, they can't bring enforcement actions against all banks or close all the banks.  There has to be a cooperative attitude to work with the banks and give them an opportunity to work through this unprecedented economic downturn.

What Can You Do?
Well, being proactive, creative, flexible and patient is about all you can do.  Identify your bank's challenges, put a plan in place to promptly address them, communicate it to your regulators and shareholders and go about the business of executing your plan.  At the core of many plans will be “downsizing” or “rightsizing,” expense control and private stock investments.

Conclusion
We clearly are in unprecedented times, with the environment around us changing literally daily.  This will be a period where the strong can survive and others may sell or otherwise disappear.

Postscript
Subsequent to drafting this Cyber-Graham, over the weekend, the Lehman Brothers bankruptcy, Merrill Lynch sale to Bank of America, the AIG financial crisis, and the "Consortium of 10" all transpired.  We are clearly in uncharted waters.  Will the government take the right steps to avoid a meltdown in the banking and financial markets?  This is a critical question.  Obviously, the government called Lehman's "bluff" for financial assistance and lost as Lehman filed for bankruptcy.  Where this is headed is unclear since we obviously have not bottomed out yet.  One thing is certain, we can not panic.  We all must work through this together with the government and the financial sector partnering in the solution.


For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com).

This article appears in the September/October issue of Western Forester.  Please click here to view the full article.

The full September/October 2008 issue of Western Forester is available here in PDF form.

Yesterday, our client, Glacier Bancorp (Nasdaq: GBCI), headquartered in Kalispell, MT, announced its proposed acquisition of Bank of the San Juans, located in Durango, Colorado, in a combination stock and cash deal valued at $22.7 million. Click here to see the news release announcing the transaction.

This transaction is Glacier's first foray into Colorado and extends its natural footprint in the Rocky Mountain states. This acquisition reflects Glacier's continuing ability to add independent banks with seasoned management teams, even in today's challenging deal environment, by using its relatively strong stock currency and capital position as consideration.

We would be pleased to discuss your comments and questions about this transaction and its implications for your institution and the industry in general.

For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) or Kumi Yamamoto Baruffi (206.340.9676 or kbaruffi@grahamdunn.com).

The recent collapse of the residential real estate boom has put significant stress on the hotel industry's fledgling condo hotel segment. Despite earlier warnings, some condo hotel developers pursued and completed borderline projects that lacked sufficient prospects for meeting the reasonable expectations of all stakeholders. These projects now face serious claims and potential litigation.

This article notes how we arrived at this time of difficulty, outlines the issues, and provides guidance on how the best results can be achieved for all stakeholders.

How We Got Here

From 2004 to 2007, the hotel industry reinvented and vigorously pursued a new segment. the “condo hotel.” At a time when the hotel industry was seeing slow but steady recovery, the condo hotel concept took advantage of the booming residential real estate market. Unlike a traditional hotel development, the condo hotel developer sold the hotel rooms as individual condominium units, with the expectation that the unit owners would then place the rooms back into the hotel's rooms inventory through a rental program. By accessing the market for residential condominiums, the developer sought and often achieved earlier and higher returns than was possible through traditional hotel development structures. And in well-conceived projects, the buyers of the units enjoyed benefits that compared favorably to traditional vacation or second-home condominium units. See "What is a Condo Hotel, Why Does it Work, and Why is it Challenging?"

By February 2006, warning flags were raised. We and others in the industry noted the hazards of condo hotel development and cautioned that borderline and even ill-advised condo hotel projects were being pursued. Developers were advised to recognize that, if a development is inevitably going to produce angry unit owners, then the short-term profit might be eaten up quickly by later litigation. We suggested that the best way to avoid a condo hotel litigation “implosion” was to pursue well-conceived projects that have strong prospects of meeting the reasonable expectations of all stakeholders, including unit owners. See "Condo-Hotels: How Developers and Owners' Associations Can Avert a Hotel Implosion".

By May 2007, “condo mania” had clearly subsided. In the declining residential real estate market, it was essential for the developer to make sure to begin development of a condo hotel project only if it worked both as a hotel (i.e., it created enough operating profit to satisfy a traditional hotel developer's expectations) and as a condo hotel (i.e., it met the potentially lower profit expectations of a typical unit owner). See "Condo Hotels: Three Years Into the Concept".

The residential real estate bubble has now burst. The condo hotel segment's promise of high, early returns fueled by the real estate bubble proved too attractive. many condo hotels that lacked sufficient prospects for meeting the reasonable expectations of all stakeholders did get built. Now, the unit owners, who expected positive or at least neutral cash flows, are seeing significant, negative cash flows and declining room values. And developers, who often remain on the premises as the hotel manager and the owner of the “hotel unit,” are faced daily with unhappy owners, increasing expenditures in time and money to deal with the owners, and even lawsuits.

But these troubled condo hotels can be reworked to achieve better stability and balance for all stakeholders if reasonable steps are taken. The stakeholders and their perspectives need to be understood. Experienced advisors must be selected. Proactive, early settlements can be achieved. The lack of organization of the unit owners often needs to be addressed. The hotel business must be evaluated to identify problems and opportunities. Claims and defenses must be objectively evaluated. The reasonable objectives for the workout can then be established and pursued to a good result.

Steps for a Successful Condo Hotel Workout

1.     Understand the Stakeholders and Their Perspectives

In a normal hotel, ownership is usually held by a single entity. Other interested parties typically include a lender and either a branded hotel manager or a non-branded hotel manager (often combined with a franchise from a national brand).

In a condo hotel, as in a normal hotel, these same other interested parties usually are involved. However, the hotel ownership structure in a condo hotel is not so simple. the hotel ownership equity is divided into many pieces held separately by numerous, unrelated parties. Some or all of the hotel's rooms are owned by separate unit owners. Typically, the commercial areas of the hotel (often referred to collectively as the “Hotel Unit”) continue to be owned and operated by the developer or its affiliate. The hotel is then run by the Hotel Unit owner, who rents the rooms under an agreement usually called a “Rental Program Agreement.” See "What is a Condo Hotel, Why Does it Work, and Why is it Challenging?"

In this structure, the most substantial equity interests in the hotel are held by the individual owners of the room units (“Room Units”). they are the ones who have, collectively, the most equity invested in the hotel. These owners are typically, if not always, unorganized. This lack of organization often is the result of a conscious decision by the condo hotel developer, who may have sought in the condo hotel structuring documents to limit the ability of the Room Unit owners to join together and exert influence or pressure on the Hotel Unit owner and thereby reduce the likelihood of conflict.

In a troubled condo hotel, the stakeholders need to understand each other's perspectives:

2.     Select Experienced Advisors

Condo hotels are complex. Well-conceived ones require skilled counselors and advisors to create and structure. Similarly, in a troubled condo hotel context, each of the stakeholders needs to obtain experienced counsel and advisors if there is to be any hope of putting the condo hotel on a constructive path.

Whether the stakeholder is the developer or its successor, a Room Unit owner, a branded manager, a lender, or another interested party (such as a spa or restaurant operator), the stakeholder needs counsel that has solid experience in the development of condo hotels as well as experience in asserting and defending claims arising out of them. This experience is needed to identify the issues, envision a reasonable reorganization or outcome, and reach those objectives in a direct and cost-effective way. Counsel should, in particular, have hotel industry knowledge and involvement so that competent, well-regarded advisors and consultants can be identified to help address any positioning issues and solve any hotel operational problems.

It is not particularly valuable for counsel to be located in the city or state where the condo hotel is located. The pool of law firms with experienced hospitality teams is small and spread throughout the country. Condo hotel experience and industry involvement is more important for good results than location of counsel's offices. Often, the firms with hospitality teams and condo hotel experience have lawyers who are members of the state bar where the project is located. this might be of some use, but is not necessary. If a local lawyer is needed for local procedural or other matters, one can always be associated without significant duplication of expenses.

3.     Consider any Mutually-Beneficial, One-Off Deals; Answer the Wake-Up Call

Sometimes a Room Unit owner may recognize the trouble early. If the developer's marketing efforts created exposure to securities and other claims, a well-attuned Room Unit owner and the developer can reach an early, separate peace. To achieve this result, the Room Unit owner will normally need to obtain a competent evaluation of the claims and present them to the developer. See Section 6, below. The developer then can consider whether an early settlement with the Room Unit owner may help the developer manage risks of wide-spread discontent.

If the developer is not already proactively involved in reworking the condo hotel, the developer should view the early approach by a well-attuned Room Unit owner as a wake-up call. The developer should immediately attempt to get ahead of the curve. It should follow the steps outlined in this article quickly and objectively. It should recognize that the problem will likely not go away by itself. If the developer can establish a cooperative relationship with the Room Unit owners and create a reasonable workout proposal that is better for the Room unit owners than litigation, then a vast amount of time, expense and liability can be avoided.

4.     Address the Room Unit Owners' Organization

As indicated in the previous Section, a smart Room Unit owner might see problems coming and get out early. Similarly, a developer can answer the wake-up call and proactively devise a solution that is acceptable by most or all of the Room Unit owners. If this does not occur, wide-spread anger, controversy, or polarization may result. Then, the stakeholders usually must address the organization of the Room Unit owners.

As indicated in Section 1, the Room Unit owners, collectively, have the most equity invested in the hotel, but they usually do not have a readily-available way to organize and work together systematically to have their needs met. For example, one might think that the condominium owners association (“COA”) would provide a platform to pursue the Room Unit owners' interests. However, the COA typically has no power to organize the Room Unit owners, engage counsel or other representatives, or spread the costs of any workout among the Room Unit owners. As indicated above, this lack of power is often intentional.

Once controversy is wide-spread, the developer usually is not well-served by settling with an individual Room Unit Owner. Then, from the Room Unit owner's perspective, it will be difficult to justify the costs to engage, on his/her own, the skilled attorneys and consultants needed to exert sufficient pressure to obtain a reasonable solution. Organizing the Room Unit owners is essential to proceed at this juncture.

In this context, the organization of the Room Unit owners may also benefit the developer, the Hotel Unit owner, or other stakeholders. Once controversy is wide-spread, it is difficult for the developer to obtain resolution if the developer must separately deal with 100 or more individual and sometimes irrational owners. The developer may initially react with alarm to the Room Unit owners' efforts to organize. But the developer should work with its hotel counsel and advisors to penetrate beyond this understandable, initial reaction. Certainly, if the organization is being created by known, plaintiffs' class-action lawyers, the situation might be on a win/lose path to adversarial and expensive litigation, and efforts should be exerted to redirect the momentum. If, however, the organizational efforts present the prospect of a unified, practical approach by experienced, constructively-oriented hotel counsel, then the developer might explore whether supporting and even initiating the organization will improve the prospects and help avoid a death spiral.

How can the Room Unit owners organize, given that the COA and the condo documents usually do not provide any organizational vehicles? Usually, a separate organization or structure must be created. To bring this task to the forefront, one or two motivated and intelligent Room Unit owners must “take the bull by the horns” and engage condo hotel counsel. Counsel can then create a contractual arrangement, a joint venture agreement, or a similar vehicle for organization. This arrangement will normally involve a steering committee that is given Room Unit owners' authority to engage counsel and other professionals, to collect prorata costs (including the costs of creating the organization), and pursue restructuring and settlement. Experienced counsel will have appropriate documentation to effect this arrangement.

5.     Evaluate the Hotel Business: Identify Problems and Opportunities

Despite the complexity of condo hotel structures, a condo hotel is still a hotel and operates as one. It is marketed to potential guests. It has a hotel manager who tries to maximize yield and market share. It has a brand, either its own individual brand or a licensed hotel brand. And, just like any hotel, its success is measured by occupancy, ADR, RevPAR, operating expenses, debt carry, and return on investment.

So an essential step in a condo hotel workout is to ignore the complex ownership and relationships of the condo hotel and to evaluate the business as an ordinary hotel.

Initially, there are the usual questions about the adequacy of the hotel's gross revenue. What is the hotel's competitive set? How is the hotel measuring up under the usual metrics. occupancy, ADR, RevPAR? If the hotel isn't measuring up, why not? Is the hotel misbranded? Would another brand deliver more value? Can the hotel's management be improved through, e.g., modified marketing approaches and better yield management? Is the management company getting appropriate supervision from the owners and stakeholders? Or is there something wrong with the physical aspects of the hotel?

Next, there are questions about the hotel's expenses. Some questions are obvious, such as whether the day-to-day operational expenses are within industry standards.

When evaluating expenses, however, a unique area of concern is likely to be fees or disguised fees. As mentioned earlier, in a typical condo hotel the Hotel Unit is owned by the developer or its affiliate. The Hotel Unit owner often has engaged a hotel management company to manage the hotel. The owners of the hotel rooms typically enter into a Rental Program Agreement (“RPA”) with the Hotel Unit owner, thereby allowing the Hotel Unit owner to manage all aspects of the hotel and the rental of the rooms. In this structure, an issue arises: what should be considered “management fees” in trying to determine whether those fees are reasonable?

In a normal hotel, one expects to pay the hotel manager a fee, the amount of which depends on the hotel's size and other factors. The fee typically has a base element (usually between 1% and 5% of gross revenues), as well as an incentive element (often between 3% and 15% of gross operating profit, with a hurdle to allow the owner to pay debt service or receive a return on equity before the incentive fee kicks in). Normally, after payment of the hotel's expenses and fees, the rest of the revenue is available to the owner for payment of debt service and for return on equity.

In a condo hotel, by comparison, the fee situation may be less straightforward and possibly skewed. Not infrequently, for example, the rental program agreement may call for the revenues to be applied as follows: first to pay the hotel manager (often a developer affiliate) 10% gross revenues; then to pay the hotel's operating expenses; then the remainder to be split 50/50 between the room owner and the Hotel Unit Owner.

Here the threshold question is, should we consider the Hotel Unit owner as simply the equivalent of the hotel manager? In the usual condo hotel configuration, the Hotel Unit owner does, in fact, operate the hotel like an ordinary hotel manager. But the Hotel Unit owner also owns the commercial areas. Does that ownership interest give the Hotel Unit owner a legitimate ownership stake that warrants a separate return on investment?

As we've pointed out in other articles, the Hotel Unit structure is often driven by necessity. This is particularly the case if the condo hotel is operated by a branded manager. A branded manager will typically require the developer to create the Hotel Unit so that the branded manager does not have to contract directly with a condominium owners association (COA). Often, though, developers have structured condo hotels this way even though no national brand is involved. See "Condo-Hotels: How Developers and Owners' Associations Can Avert a Hotel Implosion", at p. 8.

Either way, the question is whether the Hotel Unit owner's stake is a real ownership stake. Did the Hotel Unit owner have to pay real money for the ownership? Or did the developer really already get full value for the hotel when it sold out the Room Units to the owners? Does the developer really have a legitimate cost basis in the Hotel Unit?

If the Hotel Unit Owner has significant, real capital invested in the Hotel Unit, then, to that extent, some portion of the revenue retained under the fee structure might be considered a reasonable return on investment. This should be taken into account in evaluating the reasonableness of the fee structure.

If, on the other hand, the developer has already received full value for the hotel when it sold the Room Units, then arguably the ownership stake in the Hotel Unit does not have much substance. If so, then the Hotel Unit owner should be considered more like pure hotel manager, and the amount of hotel revenues that end up in the Hotel Unit owner's column should be considered management fees. This analysis may lead to a significant issue. In the example above, the fees retained by the Hotel Unit owner could be well above industry standards for normal operations. For a large hotel, a fee of 10% of gross revenues is twice the normal fee suggested by hotel industry practices. If the 50/50 split results in more fees for the Hotel Unit owner, then the issue is more prominent.

The evaluation of the condo hotel as a business will lead to some answers. These will include a determination whether the operation of the hotel should be changed to improve revenue, and whether excessive fees are resulting in bleeding that should be stemmed. The analysis will also naturally lead to an estimation of the value of the hotel, from which a value per room can be determined. a figure that is useful for all stakeholders in determining their reasonable expectations going forward. From these answers, a vision for reorganization should begin to take shape.

6.     Analyze the Legal Claims and Defenses.

In addressing a troubled condo hotel, all stakeholders need to evaluate the claims that exist so that they can read their cards realistically and set reasonable goals.

There are several bases on which claims may exist, including those described below.

      a.      State and Federal Securities Claims and Similar
      Statutory Claims

As we have written in other articles, condo hotel unit sales must be carefully structured and conducted to minimize the unit buyer's argument that the sale constituted a sale of a “security” under the securities law. (See "The Condo-Hotel: When Might the Securities Laws Apply?".) Even if a developer does its best to avoid the securities minefield, the risk cannot be avoided entirely. There is always pressure on the sales people to make sales. Buyers typically do, in fact, want to hear about projections. But securities laws direct that projections cannot be given without registration (a costly and ultimately unworkable process for most, if not all condo hotel developments). Shopping services show that, to make a sale, sales people often do cross the line and make oral statements and forecasts that can result in securities violations.

If, in the sales process, the developer and its agents did not closely follow the SEC guidelines set forth in “No Action” letters, then room unit owners may be able to assert securities claims. And even if the developer and its agents followed the guidelines, claims may still exist because the guidelines only set forth what the SEC believes to be the line between selling a security and selling real estate. the courts may interpret the line differently.

As a “broad brush” inquiry, stakeholders should ask, to whom were the units marketed and sold? Were they marketed and sold to people who wanted personal use from the units and an easy way to deal with the units when they weren't staying there? Or were the units marketed to people who bought primarily for investment purposes, speculation, and projected income from the rental program? If the former, then it is likely that there will be fewer well-grounded securities claims. If the latter, then it would stand to reason that the sales people must have said things that a pure investor would want to hear, and the likelihood of exposure would increase. A more in-depth inquiry, in which the applicable law and the SEC's guidelines are applied to the facts, is then required to establish the strengths and weaknesses of the securities claims.

In addition to claims under federal securities laws, concurrent claims may also arise under state securities laws and consumer protection acts. As with the federal laws, state law often provides a cause of action for failure to register securities, for fraud or misrepresentation (or omissions) in the sale of securities, and for unfair or deceptive acts. See, e.g., Florida's securities laws, FSA § 517.07; 517.301; see also Florida's Deceptive and Unfair Practices Act (similar to Consumer Protection Act). FSA § 501.211.

In many states, the state Attorney General has jurisdiction to investigate and bring an action to enforce the consumer protection statutes. From the developer's perspective, the risk of widening litigation and involvement by the Attorney General should be considered. From the Room Unit owners' perspective, the Attorney General's office may be considered as a resource or ally, but the Room Unit owners should weigh the benefits of Attorney General involvement against the potential of losing control over the settlement.

One issue of considerable importance in evaluating these claims is the application of relevant statutes of limitations. Although the most common claims for federal securities violations arise under section 10b-5 of the 1934 Securities and Exchange Act (including claims for failure to register), that Act does not contain an explicit statute of limitations. However, Courts have determined that the one year statute of limitations period found in the 1933 Securites Act applies to 10b-5 claims under the 1934 Act. 15 U.S.C. § 77m; Lampf v. Gilbertson, 501 U.S. 350 (1991). The one-year period runs from the date of discovery, but in no event more than three years.

State securities laws have separate statutes of limitations. For example, the statute of limitations for securities claims under Florida's securities laws is typically two years from the date of discovery. FSA § 95.11(4)(e). And if there is a consumer protection act violation, the applicable Florida statute of limitations period is normally four years. See FSA § 95.11(3)(f).

Each stakeholder must carefully apply these laws to the facts in order to establish the extent to which securities and similar claims, if they exist, may still be viable. The issue is of considerable importance, to developers and Room Unit owners alike, in determining strategy and the course of the workout.

      b.      Claims for Violation of Condominium Laws

The state laws applicable to the creation of a condominium and the sale of condominium units are entirely separate from securities laws and can be a source of exposure to liability

One area of concern typically is found in the condominium cost allocations. In structuring a condo hotel, the developer must set forth in the condominium documents the allocation of costs. For example, if the developer's structure creates a separate Hotel Unit, then condominium documents will indicate how much of the cost of the hotel operation is allocated to the Hotel Unit and how much is allocated to the Room Units. State statutes often provide that these allocations cannot be discriminatory and must be reasonable. See, e.g., Uniform Condominium Act (1980) §2-107(a) (providing that “allocations may not discriminate in favor of units owned by the declarant”).

In trying to protect the Hotel Unit from financial exposure, the developer may have decided to allocate all of the Hotel Unit's costs to the Room Unit. This approach may help limit the developer's exposure to operating losses but it can also produce litigation exposure.

Condominium laws regulate many other aspects of the structure and sale process. The application of these statutes should be evaluated by the stakeholders.

As is the case with consumer protection laws, state regulatory agencies may have the jurisdiction and motivation to become involved. For example, in Florida the State's Department of Business Affairs regulates and enforces the condominium statutes. If the condominium includes a residential component, this agency may investigate and enforce compliance.

      c.      Other Claims

Because every condo hotel, by its nature, is complex and unique, other possible claims should be evaluated. For example, specific contractual commitments or representations may have been made, such as an obligation to install certain improvements in a condo hotel conversion. The facts and applicable law must be evaluated to allow a stakeholder to understand the circumstances and the litigation alternatives to a negotiated restructuring or settlement.

7.     Establish the Objectives For the Workout

The evaluation of the hotel business, as suggested under Section 3, will identify problems and naturally lead to solutions, such as the following:

• If total revenue is less than what the competitive set statistics would suggest, then consider the need for different management, for asset management loyal to unit owners, brand repositioning, different or better marketing strategies, or improvements.
  
• If total management fees (taking into account splits under the RPAs and offsetting any amounts reasonably attributable to a legitimate ownership interest in the Hotel Unit) are out of line with industry standards for a normal hotel, then flag the conclusion that the fees need to be brought in line.
  
• If other expenses are out of line with the competitive set, then flag what needs to be brought in line and consider, again, the need for different management or for asset management loyal to unit owners.
  
• If, after considering how net operating income may be improved by the steps identified above, the hotel's value per room is still completely out of line with the selling prices paid by the Rooms Unit owners, then ask why and whether an adjustment might be reasonable under the circumstances.

The answers in the above analysis will provide an indication of where the condo hotel should end up, if the hotel is to meet the stakeholders' reasonable expectations going forward. Of course, getting there. changing the status quo. may benefit one stakeholder but very much hurt another. For those stakeholders who must “give up something” or, as they say in the workout business, “take a haircut,” the question might become, why would they want to do this?

To answer this question, the analysis of the legal claims and defenses, as suggested in Section 4, above, becomes important. The analysis will allow the stakeholder to assess the risks in litigation. The stakeholder should remember to figure into the equation the cost of litigation, both in terms of legal fees and in loss of time. These risks and potential costs can then be compared to possible settlement and workout alternatives. If, in one or more feasible workout alternatives, a stakeholder must give up things of value, but this loss in value is less than the risks and costs in litigation, then a win/win becomes possible.

The possible permutations in a workout have few limits. Creativity is needed in devising possible solutions. Consider the following areas of inquiry:

• Fix the hotel business, paying attention to the operational opportunities described in the above bullet list.
  
• Restructure the rental program and the RPAs.
  
• Restructure the condominium regime. For example, if the Hotel Unit is owned by a developer affiliate, evaluate whether the Hotel Unit might be turned over to the COA, allowing the developer to exit the project altogether.
  
• Consider how a workout can result in a complete resolution and waiver of all claims. If this is not possible because there is no organization of Room Unit owners, consider the suggestions in Section 4, above.

In the evaluation of these areas of inquiry, the stakeholders should pay somewhat less attention to topics that are zero sum games (i.e., topics where one side's gain comes only from the other side's equivalent loss). More attention should be given to topics that are win/win (i.e., one side's gain provides more value than the other side must give up). For example, making the hotel business run better as an operation can benefit all stakeholders. Focusing on these opportunities allows the stakeholders to see added benefits to a negotiated settlement, because these opportunities are not available in litigation.

8.     What If There is Deadlock?

If there are legitimate claims and significant litigation risks, coupled with a vision for a result where the stakeholders are in a more equitable position, then a workout or negotiated settlement is almost always achievable. This is because, in a negotiated settlement, the litigation costs, both in fees and loss of time, can all be saved, and measurable risks of losing can be avoided. If a stakeholder won't budge, then it is logical to conclude that one or more of the stakeholders are not reading their cards accurately. That is where good counsel is essential.

If good counsel is not present, or some other forces are preventing the stakeholders from accurately reading their cards, a mediator can help. The stakeholders should consider employing a neutral, who is well-respected in the industry and knowledgeable in the structuring of condo hotels, to assist the parties in getting to a reasonable solution.

If no progress can be made, then often there is only one way to motivate the unrealistic stakeholder, whoever it may be: litigation. If a negotiated workout or settlement still isn't achieved, then, ultimately, the litigation process can produce a result. usually an expensive one.

Conclusion

The rewards of condo hotels in the residential real estate boom were hard to resist. As a result, projects that were unsupportable or borderline went forward. Nevertheless, a reasonable result in a negotiated condo hotel workout and settlement can be achieved, if the stakeholders engage the right people, properly evaluate the hotel business, correctly analyze the claims and risks, and creatively establish and pursue reasonable objectives.

Please feel free to contact Irvin W. Sandman (206.340.9641 or isandman@grahamdunn.com) or Russell C. Savrann (206.340.9665 or rsavrann@grahamdunn.com) if you should have any questions. 

It is now July and the first six months of 2008 have produced a record low number of merger and acquisition transactions.  We have seen a number of proposed deals fall apart due to loan due diligence issues, abrupt stock price declines, tax issues and unrealistic seller expectations in a changing world.  This Cyber-Graham is intended to provide insights, based on our first-hand experience, as to the perspective of both buyers and sellers, as well as a glimpse into the future.

The Sellers' Perspective
Many sellers still have unrealistic price expectations.  Given the severe reduction in bank stock prices, as well as the dearth of available capital (can you say “no trust preferred”), sellers can't expect to attain the level of premiums paid in recent years.  Also, sellers are requiring a higher level of cash in the deal and aggressive price protection on the stock side.  Finally, sellers are nervous about acquirors' asset quality and have more aggressively conducted “reverse due diligence.”

The Acquirors' Perspective
With stock values down, buyers don't have the rich currency to pay large premiums.  Historically to pay those premiums, deal multiples have tracked bank stock trading prices.  With prices down, buyers can no longer afford the large premiums.  Further, the cash portion of any purchase is much more challenging to fund.  The market for pooled trust preferred securities has effectively all but dried up and is pricey where available.  Stock offerings are dilutive at today's bargain basement prices.  Nevertheless, several companies are going back to their shareholders for more equity.

The Regulators' Perspective
These are tough times for the regulators.  They really are between a rock and a hard place.  They don't want to miss anything, but realize that if they don't show some tolerance, they could adversely impact the economic recovery.  No doubt, capital is the elixir of the Gods.  We suspect deals will be more closely scrutinized with a focus on capital levels, asset quality and the quality of management.

Where Do We Go From Here
Many potential sellers are waiting to see where the deal market will turn.  However, there are more than a few seasoned bankers who have worked their whole career with plans to “sell out” and retire.  With deal multiples dropping, that “exit strategy” has been postponed or rethought.  A dose of reality is that bank stock price and deal multiples probably will not return to the historic levels of the past decade.  Realistically, bank stock trading multiples settling out at 1.5 times book and deal multiples coming back to 2 times book may be optimistic for the foreseeable future.  Clearly, there will be opportunities for the strong and well-capitalized.  Mergers of equals may also come about as banks look for alternative exit strategies or to achieve cost savings and efficiencies to offset thin margins, soft loan growth, regulatory burden, and asset quality challenges.

Conclusion
All in all, we are going through unprecedented times.  Now is when bankers, lawyers and investment bankers get to earn their money by engineering creative strategies and solutions in an ever-changing market.

For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.

If there was ever a time for a patent attorney to think like a business person, that time is now.  The Supreme Court handed down its anticipated decision in Quanta Computer, Inc. v. LG Electronics, Inc. (No. 06-937) on June 9, 2008.  LG, owner of a purchased portfolio of patents, sued a downstream user of LG's patented technology, which Quanta had acquired by sublicense from LG's licensee Intel.  LG lost due to the otherwise archaic doctrine of patent exhaustion.
 
Patent exhaustion extinguishes patent rights after the first sale.  But such a doctrine had been held to be limited to patented devices.  The claims in this case were method claims, related to ways of doing things, not physical devices.  The Federal Circuit Court of Appeals had earlier held that the doctrine of patent exhaustion did not apply to method claims.  The unanimous Supreme Court overruled the decision of the Federal Circuit Court of Appeals.  But the rub here is that the patent claims at issue were in the form of method claims that “substantially embodied” the product, (microprocessors and chipsets obtained from Intel under license from LG).  Because the licensee's microprocessors and chipsets substantially embodied the LG patents and had “no reasonable noninfringing use and included all of the inventive aspects of the patented methods,” exhaustion applied to the post-license use.

In other words, the Supreme Court's decision was very good news for licensees' downstream customers -- particularly in the high-tech sector, where most patent claims have been method ones -- and a bad one for patent owners.  Lawful downstream users now cannot be sued for patent infringement if the product they buy embodies--(and now substantially embodies)--the method claims in the license under the patent exhaustion doctrine.  And if the licensee did not breach any license agreement, that leaves a patentee without a remedy.  

Coupled with the earlier Supreme Court decision in MedImmune, Inc. v. Genentech, Inc., 549 U.S 118 (2007), in which the licensee no longer needs to breach the license agreement to sue for declaratory judgment that the licensed patent is invalid, licensees (and their customers) now have more leverage than ever before, and patentees appear to face greater challenges to commercializing their patents through licensing programs.

So what is a company that wants to protect its technology supposed to do?
While it may be too early to fully understand the implications of this case--particularly whether the case should be interpreted broadly or is limited to the facts at hand--here are some early take-away recommendations: 

1. Patent attorneys must understand the business goals of the technology to be patented.  Will the invention as claimed be licensed?  If so, the patent attorney should have some idea of the intended licensing revenue stream and come up with creative claims that cover what the patentee intends to license.  Patent attorneys may need to be even more creative in the type and scope of the claims depending on the anticipated use and commercialization of the technology.  For example, patent attorneys may want to consider claims in which the anticipated licensed use may itself have a noninfringing use, as an effort to cover downstream users under the patent claims while avoiding a defense of patent exhaustion by the downstream users.  Further, the Supreme Court appeared to give consideration to the final step of the method as a means of determining if the licensee is substantially practicing the invention.  Of course, caution is urged to make sure that the licensee's activities are covered by the patent claims, so that the license is necessary in the first place.
   
   
2. Patentees need to consider drafting patent licenses to impose restrictions on downstream users that make the downstream activity unlawful. The Supreme Court noted that, despite a notice requirement in the master agreement, there were no such downstream restrictions in the LG-Intel license agreement limiting downstream users' used Intel-licensed products in combination with non-Intel memory and buses.  However, the master agreement further stated that “a breach of the [master] agreement shall have no effect on and shall not be grounds for termination of the Patent License.”  Thus, neither party alleged that a breach occurred, but was required to challenge that the downstream users' claimed lawful use of the patented technology.
    
3. Patentees may want to consider obtaining a greater return for licensing their patents when downstream users will be immune from patent infringement (even if breach of contract remedies may be available with the licensee).
   
   
4. Now is a good time to conduct a review of existing patents and licensing agreements to determine if there are downstream user limitations.  If not, when the license is negotiated, add such limitations.  Also, if a patent specification supports broader claims and the patent is still within the two-year broadening-reissue window, the patentee would be wise to determine if there is a way to claim something broader than a mere form of the license grant that may capture downstream users' products.

On the whole, the patentee is still not without leverage.  But this most recent Supreme Court decision makes it more difficult to control downstream users without carefully considering the licensing objectives both from a patent and contractual perspective.  Otherwise, the use of a patented technology through a lawful license that is substantially embodied in the downstream user's product (and without a reasonable noninfringing use) can leave the downstream user safe from patent infringement claims by the patentee-licensor.

In the last six months, we have sent out two Cyber-Grahams addressing the shift in the banking winds resulting from a softening economy.  Recent developments suggest that the winds are starting to blow throughout the country, albeit at different speeds in different regions.

The Weakening Economy
The FDIC recently reported that the banking industry set aside $37.1 billion for loan losses in the first quarter of 2008.  This is about four times the $9.2 billion set aside in the first quarter last year and up from $31.3 billion in the fourth quarter of 2007.  The FDIC also said that the average interest rate margin for community banks fell to 3.70% in the first quarter, a 19-year low.  This undoubtedly reflects the unprecedented drop in interest rates by the Federal Reserve.  Further, over half of the banks reported lower earnings in the first quarter of 2008 versus last year.

The Uneasy Regulators
FDIC Chairman Sheila Bair said: “Given the weaker economy and rising level of problem loans, we are urging all institutions to make sure reserves are large enough to cover expected losses.”  At the same time, the Deposit Insurance Fund fell another 3 basis points during the first quarter to 1.19%.  With serious pockets of credit weakness throughout the country, this likely will result in increased Deposit Insurance premiums for all banks.  Further, in our meetings and discussions with Federal regulators, we have seen a growing uneasiness and substantially less flexibility across the board, no doubt reflecting their concern about credit quality.  This clearly will be a focus in the next round of onsite examinations.  Being proactive in identifying and addressing potential credit problems may mitigate the results of the exam in your favor.  

Capital is King
One thing that has become clear is the power of capital.  A strong capital position could make the difference between a bank's CAMELS rating and whether an enforcement action is brought and, if so, the severity of such action.  However, raising capital publicly in today's equity markets is very challenging and expensive at best.  Private equity appears to be available, but selectively and at a substantial cost, both in terms of price and equity dilution.  Registered and private trust preferred offerings for individual banks, preferred stock and subordinated debt are also gaining popularity as banks scramble to strengthen their capital position.  This may be particularly critical as the regulators use capital as a lever for CRE concentrations, particularly exceeding 300% of capital.

Where Are We Headed Now?
Undoubtedly, credit quality is the key.  Banks are carefully monitoring credit quality and being proactive with their borrowers, hoping that they are not left “holding the keys” and de facto engaged in the real estate development business.  There seems to be a “tornado watch” mentality, as different pockets of the country get hit with severe economic downturns that depress real estate values in particular.  There does not seem to be a quick fix to this situation.  Hopefully, solid credit underwriting practices and loan portfolio vigilance will see most banks through the blowing winds.  As always, these winds too will pass.

For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.

This article focuses on tools for holding a secure meeting.  You do not have to follow these ideas and suggestions for every meeting, but over time as you become more aware of the risks inherent with meetings, you will be better able to judge the level of security planning you need and any related additional meeting expenses.  You should always have a simple contingency plan for every meeting.  If the meeting calls for more security then take more assertive steps with the client and the host hotel.  If you anticipate trouble, take action to avoid it.

I came to respect the daily challenges of operating a worldwide meeting enterprise during the five years I was Vice President & Associate General Counsel of Starwood Hotels & Resorts Worldwide. I was responsible for the group sales division's legal issues, through the second Gulf War, 911, the Bali Marriott bombing and SARS.  I mention this because in working out details and policy we realized that security is a state of mind.  In the ordinary business world absolute security is impossible, therefore the best security is never putting oneself, or one's client in a position where there is an obvious or avoidable security issue and to always have a risk- appropriate contingency plan.

What is Security? 
The definition of Security includes freedom of fear or anxiety and also includes the concept of protection from danger. As a meeting professional planning an event you should be aware of steps to address both of these elements of security. In other words you want your clients and attendees to feel confident that you have planned a meeting that will go well and that you have assumed responsibility for the welfare of the meeting and the attendees. At the same time you want to actually protect the meeting and its attendees by making sure, among other things, that the meeting is in a reasonably safe location at a reasonably safe time.

Finding a Safe Meeting Location
The world is not a safe place. Trouble can happen anywhere at any time. The trick is to do your homework and try not to be in the wrong place at the wrong time. When vetting locations for meeting, look beyond the tourist brochures and sales incentives for real information about the host nation and city.  Look for hints that the location may be unstable or more importantly may be unstable two years from now when the meeting will be held.  Although we all fear the terrorist threat, in reality the danger to the attendees is more likely from attendees being swept up in events that are going on around them rather than events about them.

Avoiding Trouble
First get to know the internet. Frequently scan the headlines of the English language papers from the regions where you might hold meetings. I find the news about our country and our current administration very humorous and enlightening.  Think about it: Would you book a meeting in downtown Detroit during the NBA championships?  If the Detroit Pistons win, the city is in flames and your attendees from other countries may not feel freedom from fear and anxiety regarding their safety.  Likewise, there are events overseas that regularly enflame passions and draw violence that with a little research can be avoided. These can range for example, from sporting events that have a history of hooliganism between rival fans (British and certain German football fans are notorious); the annual July 12 Orange Order parades in Ireland (these parades are  intentionally routed through nationalist neighborhoods inciting violence); or local elections where the election is controversial or violence is commonplace (in certain Indian provinces and cities violence at the polls is common). This year one high profile example of a security risk related to a sporting event is the expected opposition from Tibet nationalists during the upcoming 2008 Summer Olympics. 

Certain meetings draw demonstrations and protest.  You should research which groups are targets for protest.  For example, the 1999 WTO meeting in Seattle, Washington drew 50,000 protestors to the streets; the November 20, 2003 Trade Ministers meeting in Miami, Florida had  17,000 demonstrators protesting;  the 2001 G-8 meeting in Genoa, Italy had  146 police injured and the June 3, 2007 G-8 meeting in Rostock Germany caused chaos in the streets when over 1,000 demonstrators turned violent. The point is that the delegates to these meetings were protected, but if you were hosting another meeting in the same city at that time, your meeting attendees were in danger of being caught up in the violence.

Internet Resources
Suggested links are Government websites from the US State Department www.travel.state.gov or the UK Foreign and Commonwealth Office www.fco.gov.uk/travel.  Other useful sites are the English language papers of which these are a few examples. www.timesonline.co.uk/global (EU/World); www.mg.co.za (Africa); www.theaustralian.news.com.au (Australia/APAC); www.scmp.com (Hong Kong/China); www.asiaone.com (Singapore/Indonesia)

Natural and Physical Risks
Security also includes protection from natural and physical risks.  Unless you are planning meetings for known or likely targets of protest such as the WTO, you should check your meeting site and dates for natural and physical security risks.  Use the internet to learn when the cyclone season hits or other potentially dangerous weather. We all know to avoid the Caribbean and South Florida in the fall.  Most countries have the equivalent “bad weather” seasons.  Usually, if you are offered a deal that is too good to be true, it is.  Check to see why the price is so low.  Also keep in mind that that using international brand with a conference facility does not guaranty that the facility will employ US standards of fire, life and safety especially if that facility is a franchise. Most brands require that the facility meet local code requirements. Be sure to ask about the quality of the fire, life and safety systems of the Hotel and meeting space.

Choosing the Best Hotel Location for Security
The meeting hotel location can be a factor in evaluating the security risks. Your meeting is more likely to be disrupted by your attendees being caught up in local affairs rather than your meeting being a specific target. Therefore, the safest hotels are usually airport hotels (due to the general security protocols of international air travel); hotels where visiting dignitaries are housed (due to the experience of hotel security staff); and hotels with a low profile location (as they are less likely to be located where the masses demonstrate in times of unrest such as Plaza Bolivar in Caracas, Venezuela). 

In emerging markets new hotels may have been built in locations that have recently displaced populations of disenfranchised people. In other words, in places like Rio de Janerio there is a very short distance between first world and barrio with the attendant street crime, drugs and violence.

Client Security
Check to see if your client has additional security needs.  Most multinationals have been subjected to threats and have some level of security in place.  As a meeting  professional you are obligated to ask if the client has additional security needs.  If you are assisting a Wall Street investment bank, an NGO or an American brand icon, you should investigate what the security expectations are for the meeting.  Many companies provide security for the top leadership.  You should introduce the host hotel's security officer to the client's security team early on in the process.   See if the company has travel and security insurance. Most companies with operations in Latin America and Africa Middle East have security insurance for top executives. In some circumstances attendees may be covered and not be aware of it. See if the insurance company will extend coverage of the meeting for all attendees from that company or even cover the meeting itself.  International SOS www.internationalsos.com is a well know company that provides evacuation, security and medical insurance coverage world wide.  

Identify Local Resources 
Be sure to involve the director of the client's operations in the host country. You may find there is local labor unrest that could disrupt the meeting.  The host is also likely to know where to hold the meeting and what times of year to avoid.

Ask the hotel if they have a crisis plan and whether it includes a contingency for the evacuation of guests.  Develop a simple crisis plan for the meeting. At minimum inform the local US consul that you are hosting a meeting in the country or in his city. 

Although we fear the big crisis, as a meeting professional the most likely “crisis” you will manage will be an attendee falling ill or someone being arrested. Your crisis plan should identify a local English speaking doctor (US Consul or your hotel should be able to help) who you should ask or pay  to be on call to assist with the medical needs of any attendees. If someone is admitted to the hospital it will help to have an intermediary to communicate with as you are not family and you otherwise may not be able to assist. Identify in advance an English speaking local lawyer.  If an attendee is arrested, the US Consul may not assist (or act quickly) if the arrest involves drugs or a sex crime.  Usually the consul will direct you to a lawyer anyway so better be prepared and have a relationship established.  The local lawyer will also prove to be a good local resource in planning the event. 

The Contract
The contract with your client should indemnify you from liability for security concerns as well as from liability under the Patriot Act and US Treasury Department Regulations.  You do not want to hold yourself out as a guarantor of your client's safety.  After all you are an agent of the client and the responsibility ultimately should rest with the client and the client's insurance carrier.  The Patriot Act and Executive Order 13224 provide that US citizens may not do business with people or entities identified by the US government as bad guys.  Doing business with anyone on the Treasury Department's OFAC list is a federal crime, wherever the activity takes place.  Renting a hotel room to a person on the list is specifically included in the regulation commentary.  Therefore, be sure the client contract and the hotel agreement indemnifies you from liability under the act.  Even so be smart.  We generally know from the press, who the government is concerned about, so if you are organizing an international meeting with delegates from the Iranian government or from Hamas, you can not book them in a US branded or owned hotel. You may be held personally accountable due to your involvement with planning the meeting. The lesson here is to know who will be attending your meeting as a guest speaker, attendee or entertainment. (Marriott was fined for hiring a Cuban dance troupe to entertain at a function in the Caribbean even though the group was booked through an agent and Marriott was not aware that the dancers were actually Cuban nationals.)

Your client may ask you to postpone or cancel a meeting due to their determination that there is a medical security risk.  SARS was a wake up call regarding the role international meetings play in worldwide health concerns.   Health officials are very worried that drug resistant strains of tuberculosis and avian flu will be spread through international travel.   Hotel companies are sensitive to the overreaction to perceived health risks to meeting attendees where there is an outbreak.  During the SARS crisis the Center for Disease Control (“CDC”) and the World Health Organization (“WHO”) issued conflicting travel restrictions.  If you address “epidemics” in your contract be sure to identify one or the other organization as controlling whether or not it is safe to travel to the meeting location or for attendees from an affected region to travel to the meeting.  As with the threat of violence, the likely health “crisis” will be an outbreak of the Norwalk virus or  food poisoning.  Having a local English speaking doctor on call will be a big help if this occurs. 

Be sure the hotel agreement indemnifies you and your group for loss of personal property from secure rooms. An internal review of a major hotel company's group loss history highlighted that laptop computers are the most common theft item.  Most of the theft was from meeting rooms that were to be locked when the attendees were not in the room.  The other loss issue to bear in mind is security for confidential meeting materials sent in advance to the hotel.  Many meetings have been affected by materials being compromised, or lost that are central to the meeting.  Be certain to discuss how and where the materials will be held prior to the meeting.

Conclusion
Like so many things the better prepared you are in advance the less likely you will have to use your contingency plans.  The above tips and resources are not meant to be inclusive, but should be helpful in addressing the security needs of your international meeting.
 
I hope you find these tips helpful. Your clients will feel safer with the knowledge that you have  considered security in planning their  meeting. 
 

Please feel free to contact Russell C. Savrann (206.340.9665 or rsavrann@grahamdunn.com) if you should have any questions. 

State law now requires all Washington employers to provide two new types of leave to eligible employees. The Military Family Leave Act allows spouses of military personnel to take at least fifteen days' leave of absence if a spouse will be deployed, or is on leave for deployment. The Domestic Violence Leave law provides leave for employees who are victims of domestic violence, sexual assault, or stalking to take care of legal or law enforcement needs or to seek medical assistance. 

MILITARY FAMILY LEAVE ACT

The Military Family Leave Act passed by the 2008 Legislature and effective June 12, 2008, allows spouses of military personnel to take up to fifteen days unpaid leave while their spouse is on leave from deployment, or before and up to deployment. Leave is unpaid; however, employees may elect to substitute accrued time off if available. Upon return from leave, employees must be returned to the same or an equivalent position with respect to pay, benefits, and other terms and conditions of employment. Leave is available only during times of military conflict declared by the President or Congress.

The stated purpose of the new act is to support the families of military personnel serving in military conflicts, and to assure that military families have an opportunity to spend time together before deployment and during a leave from deployment.

Who is covered?
All Washington employers, regardless of size, must provide military family leave to employees who work an average of twenty or more hours per week.

What are the notice requirements?
An employee who wants to take a military leave must notify his or her employer within five business days of receiving a spouse's notice of an impending call to duty, an order to active duty, or a leave from deployment. The Act does not specify whether notice may be oral or in writing, or whether an employer may require a copy of a spouse's military orders. Until further guidance is promulgated by the Department of Labor and Industries, employers are encouraged to develop a policy describing notice requirements.

DOMESTIC VIOLENCE LEAVE LAW

The Domestic Violence Leave law allows victims of domestic violence, sexual assault, or stalking to take reasonable leave from work, paid or unpaid, to take care of legal or law enforcement needs and obtain health care. Family members of a victim may also take reasonable leave to help the victim obtain treatment or seek help. This new law took effect on April 1, 2008, and is intended to provide employees with an opportunity to maintain financial independence necessary to leave abusive situations, achieve safety, and minimize physical and emotional injuries, and to reduce the economic consequences of domestic violence, sexual assault, and stalking.

Who is covered?
All Washington employers, regardless of size, must provide domestic violence leave regardless of whether the individual is employed on a part-time, full-time, or temporary basis.

What does the law require?
Victims of domestic violence, sexual assault and stalking may take reasonable leave, intermittent leave, or leave on a reduced leave schedule under the following circumstances:

• to seek legal or law enforcement assistance or remedies to ensure the health and safety of the employee or employee's family members. This may include preparing for or participating in any civil or criminal legal proceeding related to or because of domestic violence, sexual assault, or stalking;
• to seek treatment by a health care provider for physical or mental injuries caused by domestic violence, sexual assault, or stalking, or to attend to health care treatment for a victim who is the employee's family member;
• obtain or assist a family member to obtain services from a domestic violence shelter, rape crisis center, or other social services program;
• participate in safety planning, temporarily or permanently relocate, or take other actions to increase the safety of the employee or employee's family members from future domestic violence, sexual assault, or stalking.

Employees are also entitled to leave to obtain, or to assist a family member to obtain, services from a domestic violence shelter, rape crisis center, or other social services program, or mental health counseling related to an incident of domestic violence, sexual assault, or stalking to which the employee or a family member was a victim. A family member is broadly defined to include an employee's child, spouse, parent, parent-in-law, grandparent, or a person with whom the employee has a dating relationship. An employee may demonstrate a family relationship by providing a birth certificate, court document or other similar record, or by a statement from the employee seeking leave.

Domestic violence is not limited to violence between spouses or intimate partners. Rather, domestic violence encompasses physical harm or the infliction of fear of physical harm between family or household members, such as adult persons related by blood or marriage, or persons with a biological or legal parent-child relationship. The definition of domestic violence and household members is found in RCW 26.50.010.

Employees who take domestic violence leave must be returned to the position held prior to taking leave, or a position with equivalent benefits, pay, and other terms and conditions of employment, and at a workplace within twenty miles of the employee's previous work site. The return to work requirement does not apply (1) to employees who take leave from a staffing company if the individual is assigned on a temporary basis, or (2) if an employee was hired for a specific term or to perform work on a discrete project, the term or project is over, and the employer would not otherwise have continued to employ the employee.

Employers must also maintain an employee's coverage under any health insurance plan for the duration of the leave at the level and under the conditions coverage would have been provided if the employee had not taken the leave.

These leave rights are in addition to any additional rights provided by state or federal law. Thus, an employee, if the victim of domestic violence or sexual assault may be eligible for reasonable accommodation if the employee has a disability, or additional leave under the Family Medical Leave Act.

What are the notice and verification requirements?
Employees who request domestic violence leave must provide advance notice in accordance with the employer's policy for requesting such leave, if any. If an employee cannot give advance notice because of an emergency or unforeseen circumstances due to domestic violence, sexual assault, or stalking, the employee or the employee's designee must give notice by the end of the first day of leave.

Upon an employee's request for leave, an employer may ask the employee to verify his or her need for leave by providing any of the following:

• a police report indicating the employee or employee's family member was a victim;
• a court order providing protection to the victim;
• documentation from a healthcare provider, advocate, clergy, or an attorney;
• an employee's written statement that the employee or employee's family member is a victim and needs assistance.

An employee is required to provide only the information described immediately above to establish entitlement to leave. Moreover, an employer is expressly prohibited from requiring any additional disclosure that would compromise the employee's safety or the safety of the employee's family member in any way. All information provided by the employee when requesting leave, both written and oral, must be kept confidential including the fact that the employee or family member is a victim of domestic violence, sexual assault or stalking, or that the employee has requested or obtained leave.

WHAT STEPS SHOULD BE TAKEN IN LIGHT OF THESE NEW LAWS?

The enactment of these new leave laws will significantly increase a Washington employer's exposure to civil actions by individuals who believe they have been denied an opportunity to take leave, or who believe they have been terminated or retaliated in response to a request for leave. The Department of Labor and Industries is authorized to investigate employee complaints and to enforce job protection for employees who need leave. Carefully drafted policies and supervisor education will assist employers in complying with these new obligations, and may minimize liability.

All employers with employees in the state of Washington should be mindful of these new requirements and should also revise existing leave policies to include military family leave and domestic violence leave. Employers faced with a leave request should also think about the interplay between state law, the Family Medical Leave Act, and the Washington Law Against Discrimination, all of which may necessitate additional leave or reasonable accommodation under certain circumstances.

Additionally, domestic violence can be very challenging for both the employer and the employee. Employers are encouraged to draft a leave policy now while there is sufficient time to develop and implement practices that work for the organization. In other words, don't wait until an employee needs time off. We offer some practical suggestions below that should help you get started.

• Designate one or two people to receive leave requests, and notify employees who those individuals are in advance. Designated individuals must be familiar with the requirements of the law including the verification requirement and confidentiality obligation, and should be approachable to employees. Consider having designated employees sign a stand-alone confidentiality agreement specifically related to leave requests and information obtained from employees requesting leave.
• Maintain separate personnel files for information provided by an employee requesting leave. Information should be kept in a secured filing cabinet restricted to designated individuals. These records should NOT be kept in an employee's personnel file and should not be released to third parties unless the organization is legally compelled to do so.
• Consider how you will explain the employee's absence from work to a supervisor or co-workers given that requests for leave and the fact that the employee or the employee's family member is a victim of domestic violence, sexual assault or stalking must remain confidential.
• Consider whether an employee's domestic violence situation presents a danger to other employees, and what steps the Company should take if an employee's spouse or household member comes to work in search of the employee.

Please feel free to contact April Upchurch Olsen (206.340.9597 or aolsen@grahamdunn.com) if you have any questions or wish to discuss this issue further.

The Economy
To date, it's almost like a tornado hitting certain pockets of the West and barely leaving a trace in other locales. What is most disconcerting is that in addition to the anomaly of West Sound Bank, well-regarded community banks have announced significant loan loss provisions and increases in nonperforming loans. These are tied to the softening real estate market in the Northwest. How deep and broad this will go is still an unknown, but it is safe to assume there are more storm warnings to come. To some degree, all community banks in the West will be hit since real estate lending is at the core of what they do.

The Regulators
The other wild card out there is the regulators. We are starting to see an up-tick in regulatory enforcement actions. The FDIC sent out a not so gentle reminder about its concern over CRE loan concentrations. We are also told that the regulators are accelerating safety and soundness examination cycles for banks with high CRE loan concentrations. The feedback we are receiving is that exams are longer, harder and more contentious, with the FDIC leading the charge.

Where Do We Go From Here?
The phrase “it is what it is” is applicable here. Your loan portfolio is what it is. However, being proactive in identifying and shoring up weaknesses in your loan portfolio is a good thing. You certainly don't want the regulators to be the first ones to identify your loan problems. Building strong reserves, enhancing your capital position and actively working with your borrowers appears to be the best recipe to survive the storm. Don't forget, the regulators believe that capital cures most ills.

Conclusion
A number of factors, some of which are not directly in the control of banks, will determine the depth and breadth of the current economic downturn and its effect on banks and their customers. We suspect that the old adage “the best defense is your best offense” applies here. Being proactive would seem to be your best offense.

For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.

A Quick Summary of the Case Law

The last quarter of the 20th Century and the beginnings of the 2000s were fertile decades for the development of the law of regulatory takings and due process in land use law.  Landmark cases flowed from both the United States Supreme Court and the Washington State Supreme Court.  See, e.g., Palazzolo v. Rhode Island, 533 U.S. 606, 121 S. Ct. 2448, 150 L. Ed. 2d 592, on remand, 785 A.2d 561 (2001)(holding that regulatory takings claims inhere in the property and thus transfer to successors, and that where a property has some remaining economic use, whether a regulatory taking has occurred is a factual question measured by the reasonable investment-backed expectations of the owner), Monterey v. Del Monte Dunes at Monterey, Ltd., 526 U.S. 687, 698, 119 S. Ct. 1624, 143 L.Ed.2d 882 (1999)(allowing damages claims where after repeated modifications of a proposal to address local concerns the developer could never get approval of any project),  Dolan v. City of Tigard, 512 U.S. 374, 114 S. Ct. 2309, 129 L.Ed.2d 304 (1994)(holding that there must be a rough proportionality between the impacts of a development and the conditions that a permitting authority imposes on a development for the conditions to be constitutionally permissible), Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 112 S. Ct. 2886, 120 L. Ed.2d 798 (1992)(holding that where a regulation deprives a property of all reasonable economic use, it is a per se regulatory taking), Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 98 S. Ct. 2646 57 L.Ed.2d 631 (1978)(establishing a multi-part test for a regulatory takings, focused on the reasonable investment-backed expectations of the property owner), Manufactured Housing Cmtys. of Wash. v. State, 142 Wn.2d 347, 13 P.3d 183 (2000)(holding that a regulation taking a right of first refusal from landowners for the tenants in mobile home parks was not for a “public use” and therefore was invalid), Benchmark Land Co. v. City of Battle Ground, 94 Wn.App. 537, 972 P.2d 944 (1999)(invalidating a city requirement that a subdivision provide half-street improvement for a street that did not serve the subdivision, based on a lack of nexus and proportionality), Guimont v. Clarke, 121 Wn.2d 586, 854 P.2d 1 (1993)(establishing the Washington test for when a regulatory takings claim is shown and when the claim instead is limited to violation of due process, with potential invalidation of a regulation as the only remedy), Allingham v. Seattle, 109 Wn.2d 947, 757 P.2d 533 (1988)(invalidating the City of Seattle's greenbelt ordinance, which by precluding all use of 40 percent of lots deprived the entire lot of all economically viable use).

To continue reading the full article, please view the attached document; Damages Claims: An Update on Fifth Amendment and Due Process Issues.

I. The ESA Was A Blunt Instrument To Accomplish The Primary Goal
Of Preserving Old Growth

In the mid-1980s a growing consensus within the environmental movement sought to end the harvest of the remaining old growth on federal lands.  Essentially all old growth had been harvested from private lands in the Pacific Northwest and from most state lands.  In Washington and Oregon, 95% of the remaining old growth was on federal lands.  Harvest on national forests was reducing old growth by 1 to 2% annually.  Jack Ward Thomas, A Conservation Strategy for the Northern Spotted Owl, 7-8, 62-63 (1990).  The environmental movement argued that preservation of the remaining old growth on federal land should be given far higher priority than cutting it down for lumber.

Clearly the environmental community had a point.  Old-growth, once harvested, is for all practical purposes gone forever.  Federal lands belong to the nation as a whole, and society as a whole was entitled to change its objectives for the national forests, to preserve the remaining old-growth for its non-timber values.  The nation had done so before.  Although the writings of Gifford Pinchot sometimes vacillate between looking to the national forests for wood supply and creating the national forests to preserve the forests, during the first four decades of the existence of the national forests, they produced relatively little harvest.  By the end of World War II, however, timber supplies on private lands were depleted, and the Forest Service began an active harvest program, which was essential to housing soldiers returning from the war and their families.

In a rational and non-political world -- of course, not the world we live in – Congress might have amended the National Forest Management Act (NEMA), 16 U.S.C. §§ 1600-1687, and the Federal Land Policy and Management Act (FLPMA), 43 U.S.C. §§ 1701-1785, to explicitly preserve the remaining old growth on federal lands and to allow it to be managed only as necessary to maintain conditions that existed prior to European settlement.  Such a bill could have been crafted to avoid some of the disastrous effects of our current circumstances – such as our inability to treat forests in the dry inter-mountain west that now face catastrophic fires and epidemics because a century of fire control has left them overstocked with disease-prone species.  It might also have softened the blow to the communities and industries that had grown up around the harvest of federal timber and which had a legitimate claim to assistance adapting when society simply one day changed its mind about the best use of the national forest.  In the Reagan and first Bush Administrations there was no political possibility of passing such a law, however.  As a result, the environmental community turned to the only tool it had – the Endangered Species Act, 16 U.S.C. §§ 1531-1599, and its poster species of the moment, the northern spotted owl.

To continue reading the full article, please view the attached document, The ESA and the new Spotted Owl Litigation in Washington: When a Blunt Instrument Simply Isn't an Appropriate Tool. 

I. The First Question: Why Do You Need An Expert?

This is not meant to be a dumb or rhetorical question.  The first question that a trial lawyer must always ask when considering the selection and use of expert witnesses is whether an expert witness is really essential to the presentation of their case.  There are at least three compelling reasons to start there: 1) the expert witness is likely to be a major cost of getting the case to trial; 2) preparing and nurturing the expert witness will be a source of endless trouble in many instances, and 3) both judges and juries tend to believe, often correctly, that experts can be bought to testify to any proposition.   As a result, they may be more likely to discredit the testimony of experts than the testimony of fact witnesses, and if they do not understand or do not like or do not believe an expert, they will simply discard their testimony.   On the other hand, in many environmental cases there will be expert witnesses on both sides, and one will be believed and another disbelieved, not necessarily based on the merits of their position.  Thus hiring an expert is a major investment of client money, which is fraught with risks. 

Of course in many instances you may not expect your case to be tried, and that may in some ways change the calculation.  If you think the case will be a battle of discovery that ultimately settles after the parties have exhausted themselves, then maybe you need experts just for appearances sake.  But that is not how I handle my cases.  Like everyone else, I settle most of my cases prior to trial.  But the most favorable settlements come when the other side is persuaded that I am ready and willing to try the case, so for purposes of my thinking, the issue is always what I need in order to try the case.  That is the perspective of this paper.

To continue reading the full article, please view the attached document; Selection and Use of Expert Witnesses.

Overview
The Securities and Exchange Commission has recently adopted significant amendments to Rule 144 which will become effective February 15, 2008.

Although Rule 144's restrictions will be liberalized in several important ways, the scope of its coverage is not affected by the amendments. As before, Rule 144 is a safe harbor permitting the unregistered public sale of both “control securities” and “restricted securities.” The following summary assumes that the securities are those of a reporting company under the Securities Exchange Act of 1934, as holding periods and other limitations will differ for securities of a non-reporting company.

Control Securities -vs- Restricted Securities
To understand how the amendments to Rule 144 will specifically affect affiliates (i.e., directors, executive officers or principal shareholders) of an issuer, it is important to understand the difference between “control securities” and “restricted” securities.”

Control Securities include:

• securities that are held by a director, executive officer or principal shareholder of an issuer

Restricted Securities generally include:

• securities acquired directly from an issuer in a private placement

• securities acquired directly from a director or executive officer of an issuer (including shares that have been gifted or pledged)

Changes to Rule 144
Control Securities held by Affiliates. In the case of “control securities” held by affiliates, the restrictions imposed by Rule 144 have been relaxed as follows:

• Rule 144(g), which defines “brokers transaction” for purposes of complying with Rule 144's manner of sale requirements, has been liberalized. A broker will be able to include bid and ask quotations for the security in an alternative trading system, so long as the broker has published bona fide bid and ask quotations for the security in such system for each of the 12 previous trading days.

• In the event of “restricted securities” held by an affiliate, the minimum holding period is reduced from one year to six months. Following the six month holding period, an affiliate may resell restricted securities in accordance with Rule 144's limitations and conditions. (Note: Control securities that are not “restricted securities” are not subject to a holding period).

• The Form 144 filing threshold has been raised. Form 144 will need to be filed only if the intended sale exceeds either 5,000 shares (up from 500) or $50,000 (up from $10,000) within a three month period. However, please note that a Form 4 must still be filed in a timely manner.

The remaining restrictions for sales by affiliates under Rule 144 (current public information about the issuer and volume limitation) remain the same.

Restricted Securities held by Non-Affiliates. A “non-affiliate” for purposes of Rule 144 is a person who is not an affiliate of the issuer and has not been an affiliate of the issuer during the preceding 90 days.

In the case of “restricted securities” held by non-affiliates, the restrictions imposed by Rule 144 have been relaxed as follows:

• The minimum holding period is reduced from one year to six months.

• Non-affiliates of the issuer may sell unlimited amounts of restricted securities under Rule 144 after the six month holding period, subject only to Rule 144's “current public information” requirement.

• Non-affiliates of the issuer may sell restricted securities without any conditions after a one year holding period (reduced from the current two year period).

• Form 144 notice requirements are eliminated for sales by non-affiliates.

Gifts
As has always been the case, affiliates may gift their shares, but the donee stands in the shoes of the affiliate and takes on the same restrictions imposed on the affiliate. Since the shares received by the donee are “restricted,” the securities are subject to a holding period. However, under the amended Rule 144, the holding period has been reduced to one year. Once the shares have been held for one year, and provided such person as not been an “affiliate” of the issuer for at least three months, the shares are freely tradable. In determining the one year holding period, the donee may “tack” on the period in which the affiliate owned the shares.

Conclusion
Despite the liberalization of certain of its requirements as summarized above, Rule 144 remains a complex and potentially confusing regulation. We will be happy to assist you with any questions that may arise in connection with Rule 144 or other securities related matters. Please feel free to contact us.


For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com), Bart E. Bartholdt (206.340.9647 or bbartholdt@grahamdunn.com), or P. Denise McDermott (206.340.9661 or dmcdermott@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.

On January 28, 2008, President Bush signed the National Defense Authorization Act (NDAA), which amends the Family Medical Leave Act and expands the leave requirements of the the FMLA. Because the new law amends the FMLA, it will only apply to employers with at least fifty employees.

Previously, an Employer was required to provide an eligible employee with leave to care for an employee's own serious illness or injury, a family member (as defined by the FMLA) with a serious illness or injury, or a newborn or adopted child. The law now provides for leave under two additional circumstances:

• An employer must allow a "spouse, son, daughter, parent, or next of kin" to take up to 26 weeks of unpaid leave to care for a "member of the Armed Forces, including a member of the National Guard or Reserves, who is undergoing medical treatment, recuperation, or therapy, is otherwise in outpatient status, or is otherwise on the temporary disability retired list, for a serious injury or illness." A serious illness or injury is limited to an "injury or illness incurred by the member in line of duty on active duty in the Armed Forces that may render the member medically unfit to perform the duties of the member's office, grade, rank or rating."
  
• An employer must also allow an employee to take up to twelve weeks unpaid leave for "any qualifying exigency arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on active duty (or has been notified of an impending call or order to active duty), in the Armed Forces in support of a contingency operation." The Secretary of Labor has been charged with defining the term "qualifying exigency" and is working to draft regulations. Qualifying exigency may include leave to assist a family member to take the necessary steps to prepare for active duty. This provision of the law is not effective until final regulations have been issued; however, in the interim, the Department of Labor is encouraging employers to provide this type of leave to eligible employees.

In light of these new requirements, employers are urged to immediately revise existing FMLA policies and to discuss these requirements with managers who may receive requests for leave. Additionally, employers who receive requests for "qualifying exigency" leave are urged to consider the facts and circumstances of each request and to act reasonably in considering the request. Lastly, employers should also keep in mind the requirements of the Uniformed Services Employment and Reemployment Rights Act (USERRA) and the Washington Veterans Employment and Re-employment Act (VERA), both of which require military leave for employees under certain circumstances.

To view the changes to the FMLA, click here: http://www.dol.gov/esa/whd/fmla/fmlaAmended.htm.\

Please feel free to contact April Upchurch Olsen (206-340-9597 or aolsen@grahamdunn.com) if you have any questions or wish to discuss this issue further.

The FDIC just reported that net income of FDIC-insured commercial banks for the third quarter of 2007 declined $9.4 billion or 24.7% from the third quarter of 2006 to $28 billion. To put this in perspective, the last time banks earned less than $30 billion in a quarter was in the first quarter of 2003. No doubt the subprime mortgage hits taken by the big banks played a big role in these results.

THE QUESTION FOR COMMUNITY BANKS IS WHAT DOES ALL THIS MEAN FOR YOU?

Here is what we see as we visit boardrooms and talk with CEOs throughout the West.

• Credit quality is softening, particularly in the commercial real estate area.
• Margins continue to be pressured by Fed cuts in the prime rate and fierce competition for quality loans and core deposits.
• Funding with inexpensive deposits is a growing challenge.
• Competition for topnotch lenders is very strong and the cost is pricey.
• It will be a real challenge to meet or exceed 2007 earnings next year, with all of these forces at work.
• The wildcard is credit quality and potential write-offs, non-accruals and resultant increased provisions for loan losses.
• Many bank stock prices have receded to 12 month lows.
• The regulators are lurking and will be scrutinizing banks' loan portfolios during their next round of exams. A bad exam could lead to enforcement action and/or potential civil money penalties.
• Plaintiffs' lawyers are hovering and poised to continue filing lawsuits against banks, their executives, and boards of directors.

WHAT CAN YOU DO TO PREPARE YOURSELF?

• Obviously, your past underwriting practices will play a big part in your future results; however, it's never too late to tighten up your credit practices.
• Make sure you have a thorough independent review of your loan portfolio to test management's conclusions.
• Review your loan participation agreements and make sure you know what your rights and obligations are going forward.
• Take a hard look at your collateral positions to ensure adequacy and legal enforceability.
• Carefully review your loan files and documentation before your outside auditors and regulators examine them.
• Be proactive in your approach and management of any potential loan problems.
• Keep your Board apprised of what you are doing -- avoid any surprises.

While this is not a time to panic, it is a time to be disciplined and proactive to minimize potential asset quality, investor and regulatory issues. As always, our experienced team of corporate, bank regulatory, real estate and workout lawyers is available to consult with and assist you on these and any related matters.

For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.

Changes to the form
There are several important changes to the amended Form I-9.

1. Five documents have been removed from the list of acceptable documents in List
A. They include:

• Certificate of U.S. Citizenship (Form N-560 or N-561)
• Certificate of Naturalization (Form N-550 or N-570)
• Alien Registration Receipt Card (I-151)
• Unexpired Reentry Permit (Form I-327)
• Unexpired Refugee Travel Document (Form I-571)

2. One new document has been added to List A - the Unexpired Employment
Authorization Document (I-776);

3. The amended form also informs employees that providing a social security number
is voluntary. However, employees must provide a social security number if their
employer participates in the E-Verify program.

When do I start using the new form?
Although USCIS encourages all employers to use the revised I-9 immediately, use of the amended form is not mandatory until published in the Federal Register. Employers who rely on the old form and accept unauthorized documentation may be subject to penalties, including fines. For good measure, we encourage all employers to use the amended Form I-9 immediately for new hires and where re-verification of an existing employee is otherwise required. Employers are not required to have existing employees complete the amended Form I-9.

The amended form may be obtained on the USCIS website at http://www.uscis.gov/files/form/I-9.pdf. The USCIS “Handbook for Employers, Instructions for Completing the Form I-9,” which provides detailed information about completing the I-9 form has also been amended and can be found at http://www.uscis.gov/files/nativedocuments/m-274.pdf.

Please feel free to contact April Upchurch Olsen (206-340-9597 or aolsen@grahamdunn.com) if you have any questions or wish to discuss this issue further.

In Stevens v. Brink's Home Security, the Washington State Supreme Court held that Brink's violated state wage and hour laws by failing to pay technicians for time spent driving Company trucks from their homes to the first jobsite and back home from their last jobsite. This drive time, according to the Supreme Court, is work entitling the technicians, who were non-exempt from minimum wage and overtime requirements, to additional pay.

Brink's compensated all technicians for time spent driving between jobsites. For time spent driving to the first jobsite and from the last jobsite, Brink's offered two options. The first option allowed technicians to drive their personal vehicles from their homes to the Brink's office in Kent where they could pick up a Brink's truck and proceed to their first jobsite. The second option allowed technicians to drive the Brink's truck home and to proceed to the first jobsite directly from home bypassing the office in Kent. Technicians who selected option two were paid for drive time to the first jobsite or home from the last jobsite only if the drive time exceeded 45 minutes. The technicians alleged that all time spent in the Company truck was “hours worked” and therefore compensable under the Washington Minimum Wage Act.

The Washington Minimum Wage Act does not define “hours worked,” nor does it specifically address whether drive time is compensable. The Department of Labor and Industries defined hours worked as “all hours during which the employee is authorized or required . . . to be on duty on the employer's premises or in a prescribed work place.” WAC 296-126-002(8) Thus, to determine whether the technicians were entitled to pay, the Supreme Court considered whether the technicians were “on duty” at the “employer's premises” or a “prescribed work place.”

Deciding Factors
In analyzing whether technicians were “on duty” when driving the Brink's truck, the Court considered the extent to which Brink's restricted personal activities and controlled technicians' time. The Court relied on the following in deciding that the technicians were on duty:

• Trucks could only be used for Company business;
• Technicians could not carry non-Brinks' employees as passengers in
the truck;
• Brink's required technicians to wear seat-belts, obey traffic laws,
lock the vehicle, and refrain from carrying alcohol in the vehicle;
• Technicians could not run errands in the truck;

In addition to these factors, the Court found persuasive the fact that technicians received their jobsite assignments at home via voice mail or handheld computers, and spent time mapping the best route to reach their jobsite locations before starting their drive. Moreover, Brink's management could redirect technicians when they were en route to and from their homes. For these reasons, the Court held the technicians were on duty during the drive. The second question confronted by the Court was whether the Brink's truck is a “prescribed workplace” under WAC 296-126-002(8). The Court found that the truck was a “workplace” because it was an integral part of Brink's business. Specifically, technicians reported only once per week to the Kent office, they completed work-related paperwork in the truck, were required to drive the truck to reach customers' homes, and were required to carry the necessary tools and equipment in the truck. Also, technicians were required to keep the truck clean, organized, safe, and serviced. For these reasons, the Court held that technicians were entitled to pay for time spent commuting from home to jobsite.

Review Your Policies
This decision does not mean that employees who drive company vehicles are automatically entitled to pay for time spent driving from their homes to the workplace, or to an alternate worksite. Nonetheless, Washington employers should review company policies to determine what restrictions are being placed on the use of company vehicles, and the extent to which such employees work from their vehicles. Employers may also want to consider whether allowing non-exempt employees to drive company vehicles provides a significant benefit to the company overall.

Please feel free to contact April Upchurch Olsen (206.340.9597 or aolsen@grahamdunn.com) or Clemens H. Barnes (206.340.9681 or cbarnes@grahamdunn.com) if you have any questions or wish to discuss the issue further.

Beginning October 1, 2007, trademark applications in the United Kingdom will no longer be subject to automatic refusals due to conflicts with similar and even identical marks in earlier applications or registrations. Instead, the UK Intellectual Property Office (IPO) will send notices of a potential conflict to owners of trademark registrations and prior-filed applications – it will be the responsibility of the owner of the mark to prevent the registration of these new trademark applications by opposing them.

Owners of Community Trademarks (CTM) will receive such notifications only if they opt-in to receive these notifications and pay the required fee. Owners of UK registrations and prior-filed applications will receive these notifications from the UK IPO free of charge and without the obligation of opting in. The cost for a CTM owner to opt-in is approximately $200 (£50) per mark for a three-year period. The opt-in procedure allows CTM owners to direct where notifications will be sent, including by email. There will be a three-week period after October 1 st, which is the first day that opt-in forms will be accepted, before applications under the new regime are processed.

If you own or plan to apply for a CTM through Graham & Dunn, you'll need to let us know if you wish to opt in to the UK notification system. If you own or plan to apply for a UK trademark registration through Graham & Dunn, we will advise you if notice of potentially confusing marks is received.

International Events Bring Opportunities for Infringement

Now is also the time to be thinking about the risks of trademark infringement accompanying high visibility sporting events occurring in international host countries. Occasions such as the World Cup (scheduled for South Africa in 2010) and the Olympics (Beijing 2008, Vancouver 2010, and London 2012) always give rise to a wide range of infringing activities. If your trademark may be a potential target, this is a good time to shore up your international trademark protection with registrations in those countries.

Please feel free to contact Jane H. Kaufman (206.340.9663 or jkaufman@grahamdunn.com), Robert C. Cumbow (206.340.9619 or rcumbow@grahamdunn.com) or Kathleen T. Petrich (206.340.9672 or kpetrich@grahamdunn.com) if you have any questions or would like to discuss the planning and strategy execution for international protection of your trademarks.

In February 2006, we warned that some borderline and even ill-advised condo hotel projects were being pursued.  We asked, if a borderline project is built, how can the owners' association or the developer (if he is still in the game) help avert an implosion?  See “Condo Hotels: How Developers and Owners' Associations Can Avert a Hotel Implosion,” Condominium-Hotel Development:  Beware the Securities Law Minefield”. 

The warnings from February 2006 now appear to have been warranted.  Several significant condo hotel projects are in danger of devolving into litigation.  A very recent, prominent example is the Signature at MGM Grand in Las Vegas.  On August 27, 2007, thirty-three owners of units in that condo hotel filed a complaint in Clark County Nevada against Turnberry/MGM Grand Towers, LLC.  The complaint alleges causes of action for State securities laws violations, fraudulent misrepresentation, negligent misrepresentation, fraud in the inducement, and fraudulent concealment.  The complaint seeks rescission, as well as other remedies.

The content of our earlier “Implosion” article now finds a more urgent context.  Our analysis is reprinted below and applies today with continuing force.

To continue reading the full article, please view the attached document; When a Condo Hotel Implosion Appears Imminent, What Can be Done?

There's a storm gathering on the horizon that threatens the relatively calm waters that bank lenders have enjoyed in recent years. The media is abuzz with talk of the collapse of the subprime mortgage market. The financial markets have responded unpredictably, showing more volatility than we've seen since the start of the Iraq war. Market liquidity has deteriorated significantly. The Federal Reserve Board is trying its hardest to restore “orderly conditions in the financial markets,” but its injection of over $40 billion into the financial system and its decision to lower the discount rate may have done nothing more than temporarily slow the growing crisis. There is a growing concern that these conditions could trigger a broader financial slowdown, including rising rates of defaults and a further decline in credit quality and liquidity.

For the second quarter, there is some evidence this may already be occurring. The FDIC recently reported a 10.6% rise of loans 90 days or more past due. Net loan and lease chargeoffs exceeded $9 billion in that same period, representing the highest quarterly total since 2005. Commercial and industrial loans saw some of the largest increases in net chargeoffs and were up 71.4% from the first quarter of this year. (FDIC Quarterly Banking Profile. Second Quarter 2007.)

Bankers can hunker under their desks and wait for the looming storm to pass or they can take action to shore up their defenses against a potential market downturn. Whether it's preparing loan officers for possible workouts, conducting a full review of the bank's loan portfolio, making sure the bank understands its rights and obligations in connection with its loan participations, updating appraisals to confirm collateral valuations, assuring the bank's perfection and priority in security interests, or simply reviewing the bank's existing loan documentation, banks that are proactive in this time of calm before the threatened storm can assure themselves that they are as prepared as can be for the storm that may lie ahead.

For over a century, Graham & Dunn has partnered with its bank clients to assist them in weathering these sorts of challenging times. We would welcome the opportunity to sit down with you to discuss the challenges you see in connection with your bank's credit portfolio and to evaluate some preventative measures your bank might adopt today. Call us for an initial consultation at no cost to you or your bank. We'll even throw in an umbrella to keep you dry whenever the storm hits.

Please feel free to contact Steve Miller (206.903.4806 or smiller@grahamdunn.com), John T. John (206.340.9613 or jjohn@grahamdunn.com), or Mark D. Northrup (206.340.9628 or mnorthrup@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.

I. What is a Trademark?
A trademark is a word, phrase, symbol, product feature, or any combination of these that distinguishes in commerce the goods or services of its owner from those of others. A trademark, therefore, is an indicator of source. It does not tell what the goods or services are, but where they come from. The word “cola” is a generic term; it tells you what kind of beverage this is. The word COCA-COLA is a trademark; it tells you what provider the goods come from, and by doing so it distinguishes those goods from similar goods of the same kind provided by different sources. (As a matter of convention, in legal documents and in commentary, word trademarks are rendered in block capital letters.)
A trademark need not be a word, a group of words, or a visual design. Trademark protection is granted to trade dress. the packaging or overall “look and feel” of the trappings accompanying a business's product or services. Product configuration. the particular shape or design of a product itself. may also merit trademark protection, if it serves as a source-identifier, rather than performing a purely utilitarian function. A color or a sound or series of sounds may be protected as a trademark (think of the Intel Corporation's four-tone “logo” in its television commercials). Efforts have been made to seek protection for a particular texture or odor as well, where those serve a source-identifying function. that is to say, if they serve to alert the public that the product comes from one and only one specific source.

To continue reading the entire article, please view the attached document; Trademarks for Winemakers.

I. The First Question: Why Do You Need An Expert?

This is not meant to be a dumb or rhetorical question. The first question that a trial lawyer must always ask when considering the selection and use of expert witnesses is whether an expert witness is really essential to the presentation of their case. There are at least three compelling reasons to start there: 1) the expert witness is likely to be a major cost of getting the case to trial; 2) preparing and nurturing the expert witness will be a source of endless trouble in many instances, and 3) both judges and juries tend to believe, often correctly, that experts can be bought to testify to any proposition. As a result, they may be more likely to discredit the testimony of experts than the testimony of fact witnesses, and if they do not understand or do not like or do not believe an expert, they will simply discard their testimony. On the other hand, in many environmental cases there will be expert witnesses on both sides, and one will be believed and another disbelieved, not necessarily based on the merits of their position. Thus hiring an expert is a major investment of client money, which is fraught with risks.

To continue reading the full article, please view the attached document; Selection and Use of Expert Witnesses.

The hotel industry has its own way of doing business. Sometimes, outside of our day-to-day awareness, the industry's practices are based on cases found in dusty law books a hundred years old. But long-standing lines of cases can be overturned. When that happens, the impact on the way we do business can be surprising and far-reaching.

A change of this kind has just occurred, when the Supreme Court decided the Leegin case at the end of last month. The Leegin case says that everything we knew about a brand's ability to set rates in its franchise system is wrong.

Case History
Back in 1911, the Supreme Court in a case called Dr. Miles ruled that the federal antitrust laws strictly prohibit suppliers from setting minimum "resale" prices of their goods and services. Since 1911, courts had uniformly and consistently applied the Dr. Miles case to franchise relationships, making it illegal for a franchisor to set minimum resale prices (a practice generally referred to as vertical price fixing or resale price maintenance).

In the hotel world, the Dr. Miles ruling meant that any branded hotel company that franchises its system could not impose rate structures on its franchisees. A franchisee, for example, was free to set its own room rates even if they were inconsistent with the franchisor's suggested pricing. The ruling prevented the branded hotel company from maintaining rate integrity within the hotel company's franchise system. One consequence has been that franchisees have been free to sell blocks of discounted rooms to internet resellers, such as Travelocity, thereby allowing the resellers to undercut rates charged by the hotel company's branded web sites.

At the end of July, however, the Supreme Court changed this long-standing rule, over-ruled Dr. Miles, and substantially opened the door for hotel franchisors to exercise much greater control over rates and other prices set by hotel franchisees. In Leegin Creative Leather Products, Inc. v. PSKS, Inc. dba Kay's Kloset, the court held that "resale price maintenance" was legal, unless in a particular case the pricing activity "unreasonably restrained" competition.

Leegin was a clothing manufacturer that produced the " Brighton" line of leather products. Kay's Closet was a retail store in Texas that sold the Brighton line. Kay's Closet started selling the Brighton line at discounted prices, Leegin terminated Kay's Closet as one of its retailers for doing so, and Kay's Closet sued for violation of the antitrust laws, citing the rule in Dr. Miles. Based on Dr. Miles, Kay's Closet won in each lower court, until the case reached the Supreme Court. The high court held that Leegin's minimum resale price fixing was not categorically illegal, but was only illegal if it unreasonably restrained competition based on all of the facts and circumstances.

Price Setting and the Franchise Relationship
While it may sound technical, this change in analysis means a fundamental change in how price setting is handled in franchise relationships. It is very difficult (and expensive) to prove that a particular pricing practice unreasonably restrains competition, which means that in many (if not most) circumstances minimum resale price setting is now legal. A critical pricing practice that was once absolutely forbidden is now, in most circumstances, permitted.

Leegin provides branded hotel companies with new opportunities to manage their distribution networks. As always, a hotel franchisor is able to require its franchisees to provide specific levels of service. Now, for example, the hotel franchisor may be able to help guarantee the margins necessary to support those services by establishing minimum prices for all franchisees. Hotel franchisors may also be able to use pricing policies to protect price integrity at branded hotel web sites.

Don't forget to Consider These Key Points
Before a hotel company starts dictating minimum rates or prices to their franchisees under Leegin, however, there are several key points to keep in mind. First, the hotel franchisor may have existing franchise contracts that explicitly grant pricing freedom to the franchisees. The fact that the antitrust laws now permit a hotel franchisor to set franchisee rates and prices is not permission to violate existing valid contracts.

Second, the Supreme Court's decision affects only federal law. States are generally permitted to have more restrictive state antitrust laws (many do), and particular states may have their own rules on minimum resale price maintenance. Even in states that do not presently have such laws, there may be efforts to reinstate the Dr. Miles rule as a matter of state law.

Third, the decision in Leegin is still only a few weeks old. It may be some time before all of its consequences fully shake out. There may even be efforts at the federal level to restore Dr. Miles as a matter of federal antitrust law. Before a hotel company changes a well-established pricing program based on Leegin, it will be wise for the company to consult with its trusted counselors.

Conclusion
Whether Leegin will be good or bad for the U.S. economy may be uncertain, but whether it will affect how business is done in the U.S. is not. Hoteliers should be familiar with the new rules and determine how they may impact their alternatives and opportunities.

Please feel free to contact Irvin W. Sandman (206.340.9641 or isandman@grahamdunn.com), David C. Lundsgaard (206.340.9691 or dlundsgaard@grahamdunn.com) or Douglas C. Berry (206.340.9626 or dberry@grahamdunn.com) if you should have any questions or wish to discuss this issue further.

For almost 100 years, the federal antitrust laws strictly prohibited manufacturers and other suppliers from setting minimum "resale" prices of their goods. Automobile manufacturers were prohibited from telling their dealers what to charge for cars, clothing manufacturers were prohibited from telling retailers what to charge for clothes, etc. This rule came from a 1911 case called Dr. Miles.

At the end of last month, however, the Supreme Court changed this long-standing rule, over-ruled Dr. Miles, and opened the door for manufacturers and franchisors to exercise much greater control over the resale prices of their goods or services. The court held that such "resale price maintenance" was legal, unless in a particular case the anticompetitive effects outweighed the procompetitive benefits-in other words, if the pricing "unreasonably restrained" competition. This new ruling is not only a significant change in antitrust doctrine, it will in practice significantly affect many sectors of the U.S. economy.

The Ruling
The Supreme Court announced the new rule in Leegin Creative Leather Products, Inc. v. PSKS, Inc. dba Kay's Kloset. Leegin was a clothing manufacturer that produced the " Brighton" line of leather products. Kay's Closet was a retail store in Texas that sold the Brighton line. Kay's Closet started selling the Brighton line at discounted prices, Leegin terminated Kay's Closet as one of its retailers for doing so, and Kay's Closet sued for violation of the antitrust laws, citing the rule in Dr. Miles. Based on Dr. Miles, Kay's Closet won in each lower court, then the case reached the Supreme Court. The high court held that Leegin's minimum resale price fixing was not categorically illegal, but was only illegal if it unreasonably restrained competition based on all of the facts and circumstances.

The Consequences
While this may sound like a highly technical ruling, it will mean a fundamental change in how resale price setting is handled. It is very difficult (and expensive) to prove that a particular pricing practice unreasonably restrains competition, which means that in many (if not most) circumstances minimum resale price setting is now legal. A critical pricing practice that was once absolutely forbidden is now, in most circumstances, permitted.

Many common features of our economy are based on the former antitrust rule. For example, everyone is familiar with the acronym MSRP ("Manufacturer's Suggested Resale Price") and the disclaimer that "Prices may vary" at different stores. Experienced in-house counsel may be familiar with carefully constructed "Colgate" pricing policies. These practices are in large part the result of the Dr. Miles rule that manufacturers could not set resale prices, and are likely to change as a result of the new rule in Leegin.

Leegin provides manufacturers with new opportunities to manage their distribution networks. Manufacturers may be able to insist on dealers providing specific levels of service and on-site advertising, and then be able to guarantee the margins necessary to support those services. Manufacturers may also be able to use pricing policies to maintain brand identity, such as what Leegin itself sought to do by keeping the price of its Brighton products up, and may be able to dispense with burdensome Colgate policies that were used to achieve those objectives under the old regime.

The Caveats
Before a manufacturer starts dictating minimum resale prices to their dealers under Leegin, however, there are several key points to keep in mind.

• First, a manufacturer may have existing distribution or dealership contracts that explicitly grant pricing freedom to the distributors or dealers. The fact that the antitrust laws now permit a manufacturer to set resale prices is not permission to violate existing valid contracts.
• Second, the Supreme Court's decision affects only federal law. States are generally permitted to have more restrictive state antitrust laws (many do), and particular states may have their own rules on minimum resale price maintenance. Even in states that do not presently have such laws, there will be efforts to reinstate the Dr. Miles rule as a matter of state law. Almost forty states joined an amicus brief urging the Supreme Court to keep Dr. Miles, demonstrating extensive state level support.
• In addition, some states have industry-specific legislation (such as the petroleum industry) that prohibit a manufacturer from dictating resale prices, while others have pricing legislation that mandate minimum price mark-ups on certain items such as alcoholic beverages.
• Third, the decision in Leegin is still only a week or so old. It may be some time before all of its consequences fully shake out. There may even be efforts at the federal level to restore Dr. Miles as a matter of federal antitrust law. Before you change a well-established pricing program based on Leegin, consult your antitrust counselor.

The Effects on Dealers
The effect of Leegin on distributors, dealers, and retailers will vary. High-service dealers and retailers who desire protection from discounters may benefit because manufacturers will be able to establish resale prices and then police them. Low-overhead dealers who prefer a discount strategy may be hurt because they may no longer have the pricing freedom they once enjoyed. Given the inevitable winners and losers under the new rules, we should see many new friction points arise between manufacturers and dealers, and between dealers and dealers, as businesses adjust to Leegin.

Conclusion
Whether Leegin will be good or bad for the U.S. economy may be uncertain, but whether it will affect how business is done in the U.S. is not. Everyone in the distribution chain should be familiar with the new rules and prepared for how they are going to impact their business.

Please feel free to contact David C. Lundsgaard (206.340.9691 or dlundsgaard@grahamdunn.com) or Susan M. Johnson (206.340.8769 or sjohnson@grahamdunn.com) should have any questions or wish to discuss this topic further.

On July 12, 2007, the Washington Supreme Court invalidated class action waiver clauses in standard consumer contracts. In Scott v. Cingular Wireless (Case No. 77406-4) the Court, by a 6-3 vote, struck a clause in a standard Cingular Wireless contract as "substantively unconscionable" because it prevented class action suits which, the Court said are vital to the ability to enforce consumer rights protected by the Washington Consumer Protection Act ("CPA"), RCW Ch. 19.86.

The Court found that the class action waiver effectively prevents the consumer from pursuing valid claims that could let the contract drafter off the hook. The Court said individuals would rarely, if ever, litigate small economic claims.

Cingular also argued that the Federal Arbitration Act preempted Washington law and required the Court to enforce the class action waiver. The Court held that the contracts were not protected by the Federal Arbitration Act because the class action waiver had little to do with arbitration. The Court did not strike down, per se, the mandatory arbitration clause in Cingular standard contracts. However, the net result of the ruling was the invalidation of the entire arbitration clause because the contract provided that if a portion of the clause was stricken (the class action waiver), the entire section would be invalidated.

Cingular had tried to cure any unconscionability defects with its arbitration clause by agreeing to pay all arbitration filing, administrative and arbitrator fees and the plaintiff's attorney's fees under certain circumstances. These conditions did not save the clause due to the unseverable, invalid class action waiver.

The Court remanded the case to the trial court for further proceedings, which means that the plaintiff's class action suit will go forward in Superior Court. The Court did not invalidate mandatory arbitration clauses in all standard contracts or even all class action waivers - - only those that prevent vindication of consumer protection rights.

In a similar case, the Court also invalidated a forum selection clause in the Terms of Service of America Online, Inc. The plaintiffs had brought a class action suit in Washington courts alleging CPA violations. The Terms of Service specified Virginia as the forum for such suits. However, Virginia does not allow class actions for suits like plaintiff's suit. Because contract language such as the forum selection clause at issue prevented class action suits, the Court held that it violated the public policy underlying the CPA and had to be stricken. See Dicks v. ICT Group, Inc. (No. 77101-4).

Please feel free to contact Judith A. Endejan (206.340.9694 or jendejan@grahamdunn.com) or Richard J. Busch (206.340.9679 or rbusch@grahamdunn.com) should have any questions or wish to discuss this topic further.

Condo hotels, the industry's hot new segment, have been given prominent billing at virtually every hotel conference in the past three years. The writing on the subject, however, can seem dense and confusing to the uninitiated. This article provides an introduction to condo hotel concepts and is intended to give an accessible entry point into the field. It also seeks to provide to those familiar with condo hotels a concise, boiled-down summary that crystallizes some of the bigger-picture concepts.

What is a Condo Hotel
In a condo hotel, rooms are owned separately as condominium units. This first point is somewhat obvious: To have a “condo hotel,” condominium units are needed.

Second, in a condo hotel, condo units are rented by the hotel through a rental program. Every hotel has rooms inventory. In a condo hotel, separately-owned condominium units are intended to be made part of the hotel's inventory through a rental program. In some condo hotels, all of the hotel's rooms are sold as condominium units. In others, only some of the rooms are sold, and the developer retains a portion or a majority of the rooms as “fixed inventory.”

“Mixed use residential hotels” are sometimes confused with condo hotels. Mixed use residential hotels are typically found in urban markets. In this concept, an urban hotel, frequently four or five diamonds, is built with high-end residential condominiums on the upper floors. These condominium units are intended as residences. They are not intended to be a part of the hotel's rooms inventory. Thus, condo hotels and mixed use hotels are different animals.

What are the Advantages of Condo Hotels
the condo hotel concept is driven by its advantages to both the consumer and the developer.

Advantages to the Consumer.
Typically, the condo hotel concept is employed in places where condominium ownership is desirable for part-time use, such as a resort location. To understand the advantages of a condo hotel to the consumer, one can look at the consumer's alternative in the resort context. Before the advent of condo hotels, a consumer who wanted full ownership of a resort condominium unit only had one real alternative: to buy a unit in a traditional resort condominium development.

Consider this comparison from two perspectives: when the consumer is not staying at the condominium; and when the consumer is staying there.

In a traditional resort condominium development, what does the consumer do when he isn't staying at the condominium? He can let the unit lie vacant, thereby foregoing any income potential. Alternatively, the buyer can try to rent out the unit out himself. This alternative, of course, consumes much time and trouble. A third alternative is to hire an outside agency that would rent the unit out by the week. In any rental scenario, however, the marketing of the unit is problematic. The development's underlying documents usually do not require owners to maintain their units with any consistency. As a result, any guest interested in renting the unit will have very little confidence about the unit's quality--there is no consistent “value proposition” for the building, the development, or the units in it.

The condo hotel concept answers these concerns. The rental of the unit is handled professionally. The units are typically required to be maintained in a consistent way. The marketing of the unit is more effective, and the unit owner need not waste his time and effort. In other words, the condo hotel has an improved value proposition to the consumer, providing a better answer to the question, “what do I do when I'm not using the unit?”

The condo hotel concept also has an improved value proposition when the consumer is staying at the unit. In a traditional resort condominium, the owner's experience is very much like an apartment. A condo hotel, in contrast, provides the unit owner the expanded amenities of a hotel: room service, front desk check-in, housekeeping, and other amenities. It is easy to see why many buyers would find these benefits an improvement over a traditional resort condominium unit.

Advantages to the Developer.
The condo hotel concept also provides significant advantages to the developer. The traditional hotel developer has a long road between the time he envisions a project and the time he is able to realize a return on equity. The developer must obtain entitlements for the project, build it, open it, and then, over typically three years, stabilize the operation. Only then can the developer expect to see a return on investment or realize a profit through a sale or other liquidity event. This process can take five years or longer. In contrast, a condo hotel developer can realize a substantial return on investment much earlier, because the sales of the units usually close around the time the hotel opens for business. Additionally, the condo hotel developer has access to an additional source of secured financing: the pool of lenders that provide financing for traditional condominium development. This added source of capital can reduce lending costs.

Why are Condo Hotel Developments Challenging
Condo hotels are challenging because they raise both legal and practical complexities that don't exist in traditional hotel developments.

Legal Complexities.
Condo hotel developments present several additional legal challenges. First, there are securities law risks that do not exist in traditional hotel development. When a developer sells a hotel room as a condominium unit, a question arises: Is the developer selling real estate or an investment? The issue is crystallized when one boils down and evaluates the developer's pitch to the prospective unit purchaser. The pitch could be: “I will sell you a condominium unit. You give it back to me for much of the time, I'll rent it as part of the hotel's business, and I will make you a whole lot of money.” Alternatively, the pitch could be: “I'll sell you a condominium unit. Here it is – have fun with it.” In the former pitch, the developer is clearly selling a security, and securities laws would apply. In the latter pitch, the developer is selling only real estate, and the securities laws would not apply. To avoid securities law risks, a detailed list of do's and don'ts have developed, arising primarily out of the Intrawest no action letter. Intrawest Corporation (available November 8, 2002). For an analysis of the securities risks involved in condo hotel development. See “Condominium-Hotel Development: Beware the Securities Law Minefield,” by Bart E. Bartholdt. See also the associated article, "The Condo-Hotel: When Might the Securities Laws Apply?," also by Bart E. Bartholdt of Graham & Dunn

Second, unlike traditional hotels, a condo hotel developer must also comply with state and local condominium laws. These laws are primarily disclosure laws designed to protect prospective unit buyers by providing them with information that the state's lawmakers thought would be valuable. The laws also provide for the specific ways that the condominium regime can be created.

Third, legal complexities can arise out of the application of zoning laws to the condo hotel. Is the condo hotel a condominium? Or is it a hotel? The zoning laws often are not clear. This means that the developer must evaluate those laws and work with the local authorities to resolve zoning classification issues and questions, such as whether a unit owner must pay a transient occupancy tax when occupying the unit.

Business Complexities.
In addition to the added legal questions that arise in condo hotel development, there are also practical complexities that do not exist in traditional hotel development.

First, the hotel developer has three kinds of lenders to consider, rather than just one. There may be a traditional hotel construction/permanent lender, as is usually the case in hotel development. But there may also be a condominium lender that is experienced in the special features of condominium development loans, such as the process for sales and deed releases. And the developer needs to consider the needs of the retail lenders who will be loaning money to the purchasers of the condominium units--the way the developer configures the rooms can affect the pool of retail lenders available to the unit purchasers.

Second, the success of the project may depend on the market for residential condominiums, rather than just on the market for hotels and the supply and demand for guest rooms. Dependence on the residential condominium market might be fine when that market is hot. When it is not, however, fallback strategies may be required.

Third, there is uncertainty over rooms inventory. To avoid the application of securities registration laws, the condo hotel developer cannot force the unit buyers to enter into the hotel's rental program. As a result, the condo hotel developer cannot be sure how many rooms will be in the hotel's inventory, and this uncertainty makes revenue forecasts more challenging. See "The Condo Hotel Rental Program Agreement," by Russell C. Savrann of Graham & Dunn.

Fourth, there are normally-straightforward regulations that take on complexities in the condo hotel context. For example, developers are familiar with ADA compliance, and they know how to make sure that sufficient numbers of ADA-compliant rooms are constructed. But how is this done when all of the rooms are intended to be sold as condominium units? Another example is the application of liquor licensing laws. A hotel's liquor license normally allows delivery of alcoholic beverages to rooms in the hotel. Does the license allow delivery to units that are separately owned?

Finally, the developer may be forced to continue as the owner of the “hotel unit.” Branded hotel companies don't want to enter into management agreements with a condominium association. If a branded management company is involved, it will typically require the developer to create a “hotel unit,” composed of the commercial and common areas of the hotel, and require the developer to continue to own and run this hotel unit after the hotel rooms are sold. This structure can create conflicts of interest between the developer and the unit owners in the longer term, and can also create litigation risks. See “Condo-Hotels: How Developers and Owners' Associations can Avert a Hotel Implosion,” Irvin W. Sandman of Graham & Dunn and Kelly C. Aldrich.

The challenges of condo hotel development are many. But the industry and its counselors have done well to meet them over the last several years. The intellectual foundation of condo hotels has been set on solid ground.

Are Condo Hotels Here to Stay
Condo hotels have two significant advantages that will endure. They are an excellent solution for people who want to own a resort condo unit and don't want to leave the unit vacant or hassle with renting it. Condo hotels also provide the developer the opportunity to obtain a return of equity earlier than would be available in a traditional hotel development. These benefits are likely to continue to be very attractive until a better solution is devised. We can expect condo hotel units to be a feature in most resort developments in the coming years.

As you may have heard through the media, our client, United Savings and Loan Bank, Seattle, Washington, has agreed to merge with Washington Federal Savings and Loan Association, a wholly-owned subsidiary of Washington Federal, Inc., in a stock/cash deal.

The transaction is expected to be completed in the third quarter of 2003. This reflects the developing trend of deals using a mix of stock and cash after the demise of pooling accounting. On the heels of the announced sale of Pacific Northwest Bancorp to Wells Fargo, we suspect this is just the beginning of a spate of deals as buyers try to fill in their markets and sellers attempt to capitalize on opportunities to enhance shareholder value.

We would be pleased to discuss your comments and questions about this transaction and its implications for your institution and the industry in general.

Please feel free to contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.

Condo Hotels: Three Years Into the Concept

Condo hotels have been the industry's hot segment for the past three years. At virtually every hotel conference, the topic has been given prominent billing. Interest in the segment has not been only conceptual. Most new resort development projects have considered and often implemented condo hotel features.

This article will discuss some current thinking, trends and ideas that have surfaced in the last twelve months.

To continue reading the full article, please view the attached document; Condo Hotels: Three Years Into the Concept.

On April 26, 2007, the Washington Supreme Court unanimously ruled that radio talk show broadcasts in support of a controversial public initiative are not campaign "contributions" that must be reported by the initiative's sponsors under Washington's Fair Campaign Practices Act ("FCPA"). In San Juan County v. No New Gas Tax, (No. 77966-0), the Washington Supreme Court held that the media exemption in the FCPA applies to the speech at issue in the case. In their KVI conservative talk show, hosts John Carlson and Kirby Wilber advocated on behalf of an initiative campaign that sought to strike down a gas tax imposed by the Washington legislature. San Juan County and Seattle, Auburn and Kent obtained an injunction in Superior Court to require the campaign to report the value of the airtime discussing the initiative as a campaign "contribution", even though the discussion occurred during non-commercial airtime. The Supreme Court overturned the Superior Court, finding the media exemption applied because the talk shows were part of the content portion of a regularly scheduled radio program, for which the broadcaster does not normally require payment on a radio station not controlled by a candidate or political committee.

The court construed the Washington media exemption consistent with the federal exemption and found that the determinative question was whether the airtime ran in a regularly scheduled news medium controlled by a person whose business is that news medium. Because the regularly scheduled news medium - KVI Radio - was not controlled by a political committee, the statutory media exemption applied. The court said:

"[I]t is inappropriate to draw distinctions between 'commentary' and 'political advertising' based on the content of the publication, or the speaker's motivations, intent, campaign. Indeed, the content of a news story, editorial or commentary is largely irrelevant in deciding whether a media entity is exercising its valid press functions. "We agree with the Federal Elections Committee that for the media exemption to apply, the publication need not be fair, balanced, or avoid expressed advocacy or solicitations."

Furthermore, the court relied on an administrative rule that drew a bright line between paid and unpaid broadcast time. If the station would not ordinarily charge a fee, the broadcast "commentary" cannot be converted into political advertising simply because the hosts are engaged in political advocacy.

This decision provides clarity to Washington's broadcast industry with respect to talk show hosts discussing politically controversial topics. Because the FCPA prohibits contributions of more than $5,000 within 21 days of an election, any political discussion in non-commercial time during this time could have been deemed an illegal "campaign contribution". This decision removes the chilling effect of such a possibility upon broadcasts dealing with political candidates or initiatives.

Graham & Dunn PC filed an amicus brief on behalf of the Washington State Association of Broadcasters in the appeal, written by David C. Lundsgaard.

Please feel free to contact Judith A. Endejan (206.340.9694 or jendejan@grahamdunn.com ) or David C. Lundsgaard (206.340.9691 or dlundsgaard@grahamdunn.com) should have any questions or wish to discuss this topic further.

It was the hotel industry's “perfect storm”:  the bursting tech bubble, a recession, 9-11, the war in Afghanistan, the SARS scare, and the invasion of Iraq.   Many hotels faced serious trouble and some were forced to default on their secured loans.

The storm is behind us.  As the hotel industry basks under sunny skies, those dark days fade from memory. 

But our industry remains cyclical.  Demand is leveling off, and supply is increasing.  The demand for residential and vacation condominiums, which fueled the recent condo hotel craze, has seemingly evaporated in many markets. 

We do not expect widespread trouble for hotels in the near future, but we can expect a troubled path for some hotels.  We can use lessons from the “perfect storm” to understand this path.  We are not tempting fate by refreshing our knowledge; we are shedding light on the path so it can be traveled, if necessary, with more confidence.

When a hotel faces serious economic trouble, the trouble will often lead to covenant or monetary defaults under the hotel's secured loan.  These defaults, in turn, often lead the lender to initiate workout discussions with the owner. The discussions may end in a loan restructuring, a foreclosure, a bankruptcy filing, or all three.

In the hotel industry, workouts are frequently complicated by the existence of an extra stakeholder:  the branded management company that manages the hotel under a detailed management contract.  This article focuses on this special aspect of the workout process--the renegotiation of management agreements. What do the parties want? Where are the leverage points? Who usually wins in the renegotiation process?

What Do the Owner and the Lender Want From Each Other?
The manager's first task is to identify the interests and perspectives of the lender and the owner. The answer will vary, depending on whether the hotel is underwater or solvent.

“Underwater” Hotels
In many troubled hotel cases, the current market value of the hotel is less than the secured debt encumbering it. In other words, the owner has, at least temporarily, lost its equity. The capital that is at risk then is really the lender's. Under these circumstances, the lender usually wants either control of the hotel or actual ownership.

The owner, however, may still have an agenda. For example, a transfer of the hotel could cause a tax gain or recapture. A transfer to the lender through a foreclosure or by deed in lieu of foreclosure would trigger these tax liabilities, while producing no money to pay for the tax.

The owner often wants to defer this costly result as long as possible. Sometimes, the owner may be able to provide the lender with control without a transfer of ownership.

If structured correctly, a deal of this kind can give the owner what it wants (deferral of a large tax liability) and the lender what it wants (control). Sometimes the lender is willing to accept this offer.

"Solvent" Hotels
If the hotel is not heavily leveraged, then the owner may have significant equity, even after taking into account any decline in value attributable to the trouble the hotel has endured.

Under these circumstances, the owner will not want to give up control. The lender may be willing to restructure the loan to accommodate short-term cash flow problems. The lender will often want concessions from the owner, such as a new contribution of capital. The extent of the lender's flexibility often depends on the lender's internal situation, such as the amount of foreclosed real estate it owns or whether reserves have been taken for the loan.

What do the Owner and Lender want from the Management Company?
Because the lender has the primary financial stake in the underwater hotel, the manager can expect to negotiate primarily with the lender. On the other hand, if the hotel remains solvent, then the owner's equity still is primarily at risk and the manager can expect to negotiate mostly with the owner.

Whether the owner or the lender takes the lead in approaching the manager, both will have the same perspective: the manager must make concessions. These may include:

• A deferral of fees.
• A reduction in base fees.
• Compensating the manager based primarily on the hotel's profitability or cash flow.
• More control over budgeting and capital expenditures.
• A right to terminate the agreement with limited termination fees.
• Enhanced performance standards.

The Leverage Points in the Renegotiation of Management Agreements.
The manager's concession is often the owner's or lender's gain. What cards do the parties hold in these negotiations?

Does the Management Contract Give the Owner the Right to Terminate?
Many management agreements today have comprehensive performance clauses. These clauses tend to be unique to each deal. As a result, they need to be reviewed carefully with counsel to determine whether performance standards have been missed and, if so, what the consequences are. Obviously, if a clear termination right is triggered, the manager is at a disadvantage.

If a performance standard has been missed, however, the manager should read on--the management agreement may contain a force majeure clause that excuses performance. This clause should be reviewed with counsel to determine whether it provides relief.

The Owner's Right to Reject the Management Agreement in Bankruptcy.
Even if the management agreement does not give the owner a right to terminate the manager, the owner has another potential weapon: Chapter 11.

Chapter 11 provides a procedure to make creditors give concessions when they are unwilling to give them voluntarily. The power to force concessions on creditors is carefully (but not always clearly) defined in the Bankruptcy Code. As a result, the negotiations with the manager, like all negotiations involving troubled businesses, are heavily influenced by what can be gained by force in bankruptcy.

Management agreements are executory contracts under the Bankruptcy Code. This means that the owner, as a debtor in possession under the Bankruptcy Code, can elect to assume or reject the agreement in bankruptcy.

If the owner assumes the agreement, then the owner must cure all past defaults and must perform the agreement in full under the Chapter 11 plan. If the owner elects to reject the agreement in bankruptcy, then the agreement, in effect, is terminated, and the manager is left with an unsecured claim for damages arising from the termination. The owner is then free to replace the manager and reflag the hotel.

The Bankruptcy Code, as interpreted by the courts, gives the owner much discretion in deciding whether to assume or reject the management agreement. Accordingly, the threat to reject a management agreement in bankruptcy is real. The manager can be replaced and left with only an unsecured damage claim instead of a valuable management contract. Unsecured claims in Chapter 11 are usually paid in “tiny bankruptcy dollars,” if they are paid at all, and so the manager's unsecured damage claim may have limited value.

Factors that Temper the Owner's Right to Terminate or Reject.
The right to terminate the contract under a performance clause or reject the contract in bankruptcy are powerful weapons. The manager's leverage lies, however, in practical considerations.

First, reflagging a hotel can be expensive. Reflagging involves obvious direct costs, such as the cost of replacing signs. Also, there may be a significant cost in lost business. This is especially true if, for example, the hotel does convention business that is booked one or more years in advance, and the customers are loyal to the existing manager. The costs and risks of reflagging encourage the owner to compromise.

Second, if the owner's only right to terminate is through use of the Bankruptcy Code, then owner must first file a bankruptcy case to use this right. The bankruptcy process is extremely expensive, both in terms of professional fees and the inevitable damage to the business good will. The prospect of this cost encourages the owner to compromise rather than do battle in bankruptcy court.

Third, rejection of the management agreement in bankruptcy usually gives the manager a very large unsecured claim for rejection damages. This claim can give the manager leverage when the owner seeks confirmation of a Chapter 11 plan. Accordingly, the owner may successfully reject the management agreement only to confront significant roadblocks to achieving the owner's main business goals.

The Lender's Right to Terminate under the Subordination and Non-Disturbance Agreement.
Very frequently, at the time the loan was first made, the owner, manager and lender will have signed a “subordination and non-disturbance agreement” (SNDA).  The SNDA will often give the lender some right to choose to take advantage of the management agreement or foreclose free and clear of it. This type of provision often amounts to a contractual right analogous to the owner's bankruptcy right to assume or reject the management agreement. The leverage points between the lender and the manager are then much like those between the owner and the manager, discussed above.

Who Wins in the Renegotiation Process?
Deals that work and hold together are usually ones in which everyone is benefited. The owner has the threat of rejection in bankruptcy. The lender usually has some right to escape liabilities under the management agreement upon foreclosure. The manager has many practical considerations that discourage the owner and lender from using these rights.

To successfully renegotiate the management agreement, the manager must be willing to concede some significant points. Also, the manager must be responsive to the needs of the hotel and demonstrate that the manager has the capacity to help the business meet the objectives of the owner and lender. Similarly, the owner and manager must have a realistic view of their legal remedies. Too often, the use of these remedies results in high costs and damage to the hotel's operation, reputation and value.

Ideally, the parties to the renegotiation process understand and do not overplay their hands. If so, drastic and costly measures can be avoided, the value of the hotel can be protected, and each of the parties can achieve a result that is economically better than they could reasonably expect through litigation. The renegotiated management agreement can then be considered a win for all sides.

Management Company's Checklist when the Hotel is in Trouble:

• Understand the parties' interests. Does the owner have any equity left in the hotel? Or is the lender the real party in interest? Does the owner have a tax problem upon foreclosure? Understanding the stakes will help the parties navigate the process.

• Check the performance clauses. Read the management agreement to determine whether any performance standards have been missed and the consequences. Also check the force majeure clauses to see if they apply.

• Understand the owner's bankruptcy options. Chapter 11 gives owners the right to reject a management contract. Is the owner likely to use this tool? If so, what would the benefits/expenses be for the owner? Understanding these alternatives will allow the all parties to better read their hands.

• Check the SNDA. Now is the time to see which side did the better job in negotiating the subordination and non-disturbance agreement. Does the lender have the right to terminate the management agreement upon foreclosure? Can the lender require the manager to continue to manage the hotel, even without curing defaults under the management agreement? Will the manager have continuing access to the operating revenues after the loan is accelerated?  Will the manager have continuing access to the capital expenditure reserves in order to fund needed capital improvements? Does the manager have any exposure for unpaid expenses, including payroll? The answers may vary considerably and will affect the parties' leverage.

• Assess the manager's goals. How important is the hotel to the manager's portfolio? If the agreement is terminated, are other, potentially better management opportunities available? Sometimes, termination of a contract might be a good thing for the manager. If so, the manager should take a firm position in any negotiations.

For more information contact Irvin W. Sandman, our Indsutry Group Chair, at 206.340.9641 or isandman@grahamdunn.com.

As you may have heard in the media, yesterday, Columbia Banking System, Inc. (Nasdaq: COLB), headquartered in Tacoma, WA, announced its pending acquisitions of Mountain Bank Holding Company, Enumclaw, WA and Town Center Bancorp, Portland, OR in combination stock and cash deals valued at $60 million and $45 million, respectively.

Click here to see the news release announcing the Mountain Bank Holding Company acquisition.

Click here to see the news release announcing the Town Center Bancorp acquisition.

These deals represent Columbia's first acquisition since Bank of Astoria in 2004. Both banks will be merged into Columbia State Bank, although Mt. Rainier Bank will continue doing business under that name. Upon completion of these deals, Columbia will be $2.9 billion in assets.

We would be pleased to discuss your comments and questions about these transactions and their implications for your institution and the industry in general.

Please feel free to contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.

On March 13, 2007, the Ninth Circuit Court of Appeals overturned San Diego County's wireless facilities zoning ordinance on the grounds that the County's ordinance imposed voluminous filing requirements on wireless carriers, placed too much discretion in the hands of land use authorities, and threatened criminal penalties for violations of the ordinance. The Court's decision will have a significant impact on the wireless industry's land use applications because many cities and counties have adopted wireless facility zoning ordinances with similar provisions.

In Sprint Telephony PCS, L.P. v. County of San Diego, the Court of Appeals upheld a permanent injunction against San Diego County prohibiting the County from enforcing its wireless facilities zoning ordinance. The ordinance required wireless carriers to make extensive filings for proposed sites, including:

Site Details: Identify the area served by the site, list all of the applicant's other sites in the area, and describe why the site is necessary to the applicant's network;

Visual Impact: Submit a “visual impact analysis” that describes the maximum silhouette, viewshed analysis, color and finish palette and proposed screening, and include simulated photographs of the site; and

Narrative: Create a narrative detailing the site's height, maintenance, noise emissions, alternative placement in a preferred site, landscape plan, fire service plan, hazardous materials use, maintenance personnel parking plan, and a letter stating the applicant's willingness to allow other carriers to collocate on the facility whenever technically and economically feasible and aesthetically desirable, and the lease area of the proposed facility.

The review process under the wireless ordinance gave the County authorities significant discretion to:

Compatibility: Determine whether the location, size, design, and operating characteristic of the proposed site will be compatible with adjacent uses, residences, or structures;

Impact of Use: Consider specific items in the ordinance, but also allowed the authorities to consider “any other relevant impact of the proposed use”;

Consistency: Determine whether the proposed facility is appropriately camouflaged, consistent with community character, and designed to have minimum visual impact; and

Conditions: Impose conditions on the use consistent with the objectives of the new wireless ordinance, to permit a series of open-ended public hearings, and to order revocation or modification of the permit following a violation. The court noted that it is a misdemeanor or infraction to violate the use permit's conditions.

The Court of Appeals upheld the permanent injunction against the County, referring to the Court's prior objections to similar requirements in City of Auburn v. Qwest Corp., 260 F.3d 1160 (9 th Cir. 2001). The Court specifically objected to the wireless ordinance's voluminous filing requirements, placement of open-ended discretion in the hands of the land use authorities, and threat of criminal penalties for violations of the ordinance:

”The [ordinance] itself explicitly allows the decision maker to determine whether a facility is appropriately ‘camouflaged,' ‘consistent with community character,' and designed to have minimum ‘visual impact.' See WTO Sections 6985, 6987. We find the County's retort. that the elements of the WTO . . . are unobjectionable for the simple reason that the WTO is a zoning ordinance rather than a franchise or public right-of-way ordinance. unconvincing."

The Court held that wireless carriers may challenge the lawfulness of an entire wireless facility zoning ordinance under 47 U.S.C. §253(a), rather than being required to file separate challenges to each individual decision of a local zoning authority under 47 U.S.C. §332(c)(7). Finally, the Court held that wireless carriers do not have a right to damages and attorney's fees under 28 U.S.C. Section 1983 for violations of 47 U.S.C. §253(a).

If you have any questions about the Court's decision or how the decision might affect particular wireless facility zoning ordinances, please feel free to contact Richard J. Busch (206-340-9679 or rbusch@grahamdunn.com), Judith A. Endejan (206.340.9694 or jendejan@grahamdunn.com) or Elaine L. Spencer (206.340.9638 or espencer@grahamdunn.com)

On March 5, 2007, the Federal Communications Commission issued a sweeping Order that limits the authority of local governments (local franchising authorities or LFAs) over the cable franchise process, to promote increased video competition and accelerated broadband deployment.

The FCC specifically preempted local regulations for the franchising process as follows:

Time Limits for Action

• Franchises must be granted within 90 days for entities with existing authority to access public rights of way;
• Franchises must be granted within six months for entities that do not have authority to access public rights of way;
• The time period is measured from the date that the applicant first files an application in writing with the LFA; and

In the event a LFA does not meet the deadline, the LFA will be deemed to have granted the applicant an interim franchise based on the terms proposed in the application.

Build-Out Requirements

• LFAs cannot refuse to franchise when the applicant will not agree to unreasonable build-out requirements;

"Unreasonable" means requiring a new entrant to serve everyone in a franchise area before commencing service; requiring incumbent LEC's to build out beyond their footprint; requiring build-out in a shorter period of time than the incumbent cable operator; requiring build-out in areas of lower density than those served by the incumbent cable provider; or requiring build-out to buildings or developments to which the new entrant cannot obtain access or that otherwise cannot be reasonably reached; and

• LFAs can still prohibit redlining.

Franchise Fees

• Cannot be based on revenues from non-cable services such as Internet access services;
• Non-incidental franchise related costs must count towards the 5% franchise fee cap ("cap") (i.e. attorney's fees and consultant's fees);
• In-kind payments unrelated to the provision of cable service must count towards the cap; and
• Payments made in support of PEG access facilities count towards the cap.

PEG/Institutional Networks

• LFAs cannot impose completely duplicative PEG and I-Net requirements;
• An I-Net can only be required if it would provide additional capability or functionality;
• LFAs cannot force an applicant to pay for an I-Net that will not be constructed; and
• New entrants cannot be forced to provide more PEG support than the incumbent cable operator.

Level Playing Field Obligations

• LFAs cannot insist that competitive applicants meet substantially all the terms and conditions imposed on the incumbent cable operator.

The FCC concluded that it had broad preemptive authority over an LFA's ability to regulate municipal right of ways pursuant to 47 USC §541(a)(1) which states that a franchising authority "may not unreasonably refuse to award an additional competitive franchise". The Commission also reasoned that Section 706 of the Telecommunications Act of 1996 authorized it to encourage broadband deployment by removing barriers to infrastructure investment.

The Order tentatively concluded that its findings should apply to cable operators that have existing franchise agreements as they negotiate for renewal with LFAs. However, the FCC called for additional comment on this tentative conclusion. It also called for additional comment on the impact of this Order on "most favored nation clauses" that may be included in existing franchises and on its tentative conclusion that the FCC cannot pre-empt state or local customer service laws that exceed the Commission's standards. Given the fact that 468 parties filed comments in this docket, further comment will be robust, no doubt!

See In the Matter of Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as amended by the Cable Television Consumer Protection and Competition Act of 1992,(MB Docket No. 05-311) FCC 06-180 (Rel. March 5, 2007).

Please feel free to contact Judith A. Endejan (206.340.9694 or jendejan@grahamdunn.com) should have any questions or wish to discuss this topic further.

In a decision reported last Thursday, Davis v. Baugh Indus. Contractors, the Washington State Supreme Court abolished Washington's long-standing completion and acceptance doctrine. The doctrine relieved contractors of liability to third persons once the contractor's work was completed and accepted by the owner. The doctrine was premised on the assumption that if an owner inspects and accepts the contractor's work, the owner should be responsible for any defects in the work. Although the completion and acceptance doctrine had been eroded by various exceptions, the rule had been Washington law for more than 40 years.

A majority of the court found the doctrine to be "outmoded, incorrect and harmful" and adopted a rule consistent with the majority of other states that have considered the doctrine. A majority of the states, which Washington now joins, hold contractors liable for the dangerous conditions they create even after their work has been inspected and accepted by the owner. Links to the decision, and the dissenting opinion of the Court are at the end of this article.

Summary of the case
Davis v. Baugh Indus. Contractors involved fatal injuries to an employee of Glacier Northwest for whom Baugh had contracted to install a network of underground pipelines for Glacier's aggregate processing plant in Dupont, Washington. Baugh substantially completed its work and Glacier accepted the work in April 1997. Shortly thereafter, Glacier began operating the plant. Three years later, Glacier noticed ponding water above one of the underground pipelines Baugh had installed, and investigated to determine the source of the leak. Glacier's foreman, Davis, was tragically killed when the trench dug to uncover the pipeline collapsed in on him. There was evidence that the leak in the line "might have been caused by a gouge or dent in the pipe" when it was installed.

The trial court dismissed Davis' estate's claims against Baugh based on the completion and acceptance doctrine-shifting the responsibility for the accident to the owner and operator of the plant. Glacier, Davis' employer, was immune from suit because of Washington's Industrial Insurance Act, and the estate was limited to Davis' worker compensation benefits. The Supreme Court reversed the trial court's decision, and thus the claims against Baugh will go to trial on whether Baugh was at fault in installing the pipeline and whether its negligence was a cause of Davis' death.

What to do now
Owners and contractors should consider the following in response to the Court's decision, which highlights the importance of thinking about the rights and obligations of parties after the completion and acceptance of their project.

• Most construction contracts include mutual indemnities. An indemnity, however, may not be effective without an express waiver of Industrial Insurance Act (IIA) immunity. For instance, Glacier may have been at fault for not having trained its employees or enforced its safety rules, but Baugh would not be able to recover from Glacier for its negligence without an effective indemnity and waiver of Glacier's IIA immunity.
• Owners and contractors should clearly define what, if any, "warranties" for the work exist after the work is completed and accepted by the owner. The "quality" of the work is usually one of the more important parts of the bargain for owners, and provides an incentive for the contractor to self-police its work and the work of its subcontractors. This is especially important because most contracts do not provide for full-time inspection of the contractor's work.
• Owners and contractors should also clearly define whether claims for "defectively performed" work survive completion and acceptance of the work. Contract forms drafted by the Engineers Joint Contract Drafting Committee, for instance, specifically state that inspection and acceptance of the work will not relieve the contractor of its obligation to perform the work in accordance with the contract documents.
• If there are obligations to correct defective work, contractors should clearly define the owner's obligation to provide notice of defective work and an opportunity for the contractor to correct the defective work. This provides the contractor an opportunity to investigate the owner's claims before the work is altered and to mitigate its damages.

Conclusion
Although the completion and acceptance doctrine had been significantly eroded, and one could argue that the industry did not put much reliance in the rule, the Court's ruling points out the importance for both contractors and owners of thinking about rights and obligations that should continue after completion and acceptance of a project. This is especially important in light of Washington's economic loss doctrine, which is a vital doctrine in this State's construction industry, and which limits parties to the remedies they bargain for in their agreements.

Please feel free to contact Stephan H. Goodman (206.340.9607 or sgoodman@grahamdunn.com) should have any questions or wish to discuss this topic further.

Our client, Glacier Bancorp (Nasdaq: GBCI), headquartered in Kalispell, MT, today announced its pending acquisition of North Side State Bank in Rock Springs, Wyoming, in a combination stock and cash deal. Click here to see a copy of the news release announcing the deal.

This transaction marks Glacier's second foray into Wyoming, where the $121 million North Side will be merged into 1st Bank, Evanston, Wyoming, giving Glacier a $500 million presence in southwestern Wyoming. This acquisition reflects Glacier's continuing ability to add banks at reasonable premiums to expand its established geographic footprint. In addition, during the second half of 2006, Glacier completed its acquisitions of Citizens Development Corporation, Billings, Montana in a cash/stock deal valued at approximately $77 million, and First National Bank of Morgan, its first whole-bank deal in Utah.

We would be pleased to discuss your comments and questions about this transaction and its implications for your institution and the industry in general.

For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com).

The citizens of Washington have apparently defeated Initiative 920, which would have repealed the Washington state estate tax that Governor Gregoire signed into law on May 17, 2005.

Unlike prior law, the current Washington state estate tax is no longer tied to the federal estate tax system. For example, the chart below compares the amounts that can pass free of estate tax over the next several years. The differences in the two systems present challenges that require careful planning and coordination.

Here are illustrations of estate tax that would be payable for hypothetical estates of decedents dying in 2006.

Make sure that your estate plan takes into consideration the increased amounts that can pass free of estate tax and the coordination required because of the differences in the federal and State of Washington estate tax systems.

Please contact Marcia K. Fujimoto (206.340.9637 or mfujimoto@grahamdunn.com) or Wendy S. Goffe (206.340.9633 or wgoffe@grahamdunn.com) for more information of if you would like to review your current estate plans ensuring they are flexible and work to your advantage.

New Statute Overrules Moseley v. V Secret Catalogue, Inc.; Confirms Causes of Action for Blurring and Tarnishment; and Reinstates "Likelihood of Dilution" Standard for Proving Dilution of a Famous Trademark

On October 6th, President Bush signed the Trademark Dilution Revision Act of 2006 ("TDRA"), which clarifies the standard of proof trademark owners must meet to prove dilution of a famous trademark. By amending the Federal Trademark Dilution Act of 1995 (the "1995 Act"), TDRA overrules the confusing standard the U.S. Supreme Court established three years ago in Moseley v. V Secret Catalogue, Inc., 537 U.S. 418 (2003). It also removes the doubt V Secret cast over whether trademark owners can establish dilution through the traditional showing of blurring. This is important news for owners of famous marks.

Legal Framework
Trademark dilution is defined by statute. It generally occurs when the strength of a well-known mark is weakened by another party's use, even if the consuming public is not likely to be confused about which product comes from which source. In this way, dilution differs from trademark infringement, which depends on a likelihood of consumer confusion. Classic hypothetical examples of dilution are third-party use of DUPONT for shoes, BUICK for aspirin, and KODAK for pianos. Even if consumers would not think that Dupont had gotten into the shoe business, General Motors in the aspirin business, and Kodak in the piano business, courts would find that third-party use would erode the strength of those marks. Putting a stop to such use was the purpose of the 1995 Act, which TDRA amends.

Moseley v. V Secret
Congress primarily intended TDRA to address the Supreme Court's controversial opinion in V Secret. In that case, the Supreme Court considered whether an adult novelties store called "Victor's Little Secret" diluted Victoria's Secret's famous mark, VICTORIA'S SECRET. Victoria's Secret offered evidence of a customer who associated "Victor's Little Secret" with VICTORIA'S SECRET but did not as a result think any less of the well-known lingerie store his wife and daughter patronized. Victoria's Secret also did not provide any evidence that "Victor's Little Secret" had lessened the strength of the VICTORIA'S SECRET trademark. V Secret, 537 U.S. at 434.

The Supreme Court found the 1995 Act "unambiguously" required a showing of "actual dilution," rather than the "likelihood of dilution" test the Sixth Circuit had applied. Applying the actual dilution standard, the Court held that Victoria's Secret had not proven its claim. The Court found that at least where the marks are not identical, a trademark owner must offer a survey or other direct evidence that its mark has been measurably impaired to prove actual dilution. In the case of identical marks, the Court suggested that circumstantial evidence may be sufficient, but did not elaborate further. Id.

These vague standards left trademark owners wondering how they were supposed to prove actual dilution. The Seventh Circuit commented that the Supreme Court "did not explain and no one seems to know what [its required] "circumstantial evidence" might be." Ty Inc. v. Softbelly's Inc., 353 F.3d 528, 536 (7 th Cir. 2003). Some critics noted that the "actual dilution" standard required trademark owners to suffer the very harm that the 1995 Act was supposed to prevent before they were entitled to a remedy. The International Trademark Association, which represents trademark owners, argued that the 1995 Act provided a cause of action to remedy dilution, but "the Supreme Court has interpreted it in a manner that makes it at best ambiguous and at worst nearly impossible to establish." Trademark Dilution Revision Act of 2005: Hearing on H.R. 683 Before the Subcomm. on Courts, Internet, and Intellectual Property of the House Comm. on Judiciary, 109 th Cong., 1 st Sess. 9 (2005) (statement of Anne Gundelfinger, INTA).

New Standard for Proving Dilution
TDRA solves these problems. It restores the likelihood of dilution standard similar to the one the Second, Sixth, Seventh, and Ninth Circuit had applied before V Secret. Now, the owner of a famous mark can prevail against another person who:

15 U.S.C. § 1125(c)(1) (2006) (emphasis added).

Express Recognition of "Blurring" and "Tarnishment"
TDRA pegs the specific proof needed to establish a likelihood of dilution to the type of dilution alleged. Its recognizing dilution in both blurring and tarnishment forms is important in light of V Secret, where the Supreme Court cast doubt on whether blurring remained a viable form of dilution.

TDRA defines "dilution by blurring" as "the association arising from the similarity between a mark or trade name and a famous mark" that impairs the ability of the famous mark to distinguish goods produced by the owner of the famous mark from goods produced by the owner of the similar mark or trade name. Id. at § 1125(c)(2)(B). An example of blurring is Victoria's Secret's evidence that one of its customers mentally associated "Victor's Little Secret" with its famous mark, VICTORIA'S SECRET. Though the Supreme Court found that evidence insufficient to prove actual dilution, it would be evidence of a likelihood of dilution under TDRA's new standard because the association arose from the similarity or identity of the two marks.

In considering dilution by blurring, TDRA authorizes courts to consider "all relevant factors," including:

• The degree of similarity between the mark or trade name and the famous mark;
• The degree of inherent or acquired distinctiveness of the famous mark;
• The extent to which the owner of the famous mark is engaging in substantially exclusive use of the mark;
• The degree of recognition of the famous mark;
• Whether the user of the mark or trade name intended to create an association with the famous mark; and

Any actual association between the mark or trade name and the famous mark.

Id. at § 1125(c)(2)(B)(i)-(vi).

TDRA defines "dilution by tarnishment" as the "association arising from the similarity between a mark or trade name and a famous mark that harms the reputation of the famous mark." Id. at § 1125(c)(2)(C). In V Secret, for example, tarnishment may have existed if Victoria's Secret had produced a survey showing that consumers who were not aware of "Victor's Little Secret" regarded "Victoria's Secret" as "tasteful," while consumers who were aware of Victor's Little Secret" regarded " Victoria's Secret" as "tasteless."

New Definition of "Famous" Trademark
Dilution assumes that a mark is "famous." Yet, the 1995 Act did not define that term. Its failure to do so led to a split in the circuits as to how well known a mark had to be to qualify for protection. Six of the twelve federal circuits recognized "niche market" fame in a local area or specialized market; three circuits rejected that concept; and three had not addressed the issue. TDRA resolves this conflict by requiring fame on a national level. It defines a "famous" mark as one that is "widely recognized by the general consuming public of the United States as a designation of source of the goods or services of the mark's owner." Id. at § 1125(c)(2)(A). This definition limits dilution remedies to those marks that literally are household names.

TDRA also clarifies that a famous mark need only be capable of functioning as a trademark " that is, able to distinguish one source of goods from another. Contrary to treatment in the Second Circuit, it now does not matter whether the mark was distinctive from inception (because the mark is inherently strong) or became distinctive through use (because the public has come to associate the mark with the source). All famous marks are now created equal.

In determining whether a mark is famous, TDRA replaces the eight nonexclusive factors listed in the 1995 Act with four nonexclusive factors. They are:

• The duration, extent, and geographic reach of advertising and publicity of the mark, whether advertised or publicized by the owner or third parties;
• The amount, volume, and geographic extent of sales of goods or services offered under the mark;
• The extent of actual recognition of the mark; and
• Whether the mark was federally registered.

Id. at § 1125(c)(2)(A)(i)-(vi).

Remedies
Like the 1995 Act, TDRA primarily provides injunctive relief. TDRA also provides for the recovery of damages, lost profits, treble damages, and destruction of the infringing articles, subject to the court's discretion, if the defendant's mark is first used in commerce after October 6, 2006 " the date TDRA was enacted " and the defendant either intends to trade on the recognition of the famous mark (in the case of blurring) or intends to harm the reputation of the famous mark (in the case of tarnishment). In very limited circumstances, TDRA provides for an award of attorneys" fees and costs.

Exclusions
Addressing free speech concerns, TDRA excludes causes of action involving fair use of a famous mark, including such use in advertising, parody, criticism, or commentary involving the mark's owner; news reporting; and noncommercial use.

Conclusion
TDRA simplifies and strengthens the federal dilution cause of action by both narrowing and broadening its scope. It limits protection to nationally known marks where, before, some courts recognized niche market fame. At the same time, it expands protection after V Secret by enabling owners of famous marks to curtail dilution before actual harm occurs. In short, TDRA restores an important tool for protecting well-known marks.

TDRA Text
The full text of H.R. 683, introduced by Rep. Lamar Smith (R-Tex) and passed by an overwhelming majority, is available here.

Please feel free to contact Michael G. Atkins (206.340.9614 or matkins@grahamdunn.com) should have any questions or wish to discuss this topic further.

On August 17, 2006 President Bush signed the Pension Protection Act of 2006 (The "PPA"). While the bulk of the PPA is designed to strengthen pension funds, there are also several key provisions which will affect charitable giving for individuals. Congress has been considering these charitable provisions for several years. The most important change for individuals is the allowance of current IRA charitable rollovers. The highlights of the charitable provisions contained in the Act are summarized below.

1.The IRA Charitable Rollover
For two years, beginning January 1, 2006 and ending on December 31, 2007, individuals over age 70 ½ on the date of distribution may roll over up to $100,000 from an IRA to certain public charities. The funds rolled over to the charity will be referred to as "qualified charitable distributions." Under prior law, a distribution of funds from an IRA that were subsequently given to charity were still subject to income tax. Under the PPA, for up to $100,000 no income is recognized; accordingly, no charitable deduction is necessary. An added benefit of the qualified charitable distribution is that it may be treated as part of an IRA owner's required minimum distribution for 2006 and 2007.

IRA rollovers may not be made to donor advised funds, private foundations, supporting organizations or to charitable annuity plans. Only traditional and Roth IRAs qualify for the rollover. Taxpayers with other types of retirement plans may be able to roll those plans to an IRA and then use the IRA rollover to make charitable gifts.

The IRA rollover provisions are effective immediately. The Treasury is still working on the forms, but IRA owners may contact their IRA custodian now to direct transfers to qualified public charities.

We would be pleased to discuss your comments and questions about this transaction and its implications for your institution and the industry in general.

2. Clothing and Household Items Deductible if "Good Used Condition or Better"
Many taxpayers donate clothing and household items frequently to charities and take a charitable deduction. As a result of the PPA, a charitable deduction will now be permitted only if the clothing or household item is "in good used condition or better." However, if the item is valued at over $500 and is not in good used condition, a taxpayer may still receive a charitable deduction if he or she provides a qualified appraisal. These new rules apply to household items such as furniture, furnishings, electronics, appliances, and clothing. Different rules apply to food, art, jewelry and collections of items. Taxpayers may want to keep photographs of donated items to document their condition.

3. Record Keeping and Substantiation for Cash Gifts
As a result of the PPA, any gift of money (whether in cash or by check) must be documented by a bank record or a written acknowledgement from the recipient charity in order to be deductible. A written acknowledgement from the recipient charity must specify the amount and date of the contribution.

4. Gifts of Fractional Interest in Art
Gifts of fractional interests in art and collections are generally deductible at fair market value. Fractional gifts have been a popular charitable planning tool for art and other types of collectors. However, the PPA imposes new limitations on future fractional gifts:

• (i) once a fractional gift is made, the value of any subsequent fractional gifts will be based on the lesser of the initial fair market value of the gifted property (at the time of the gift of the first fraction) or the value at the time of the future fractional gift;
• (ii) the gift must be completed within the earlier of 10 years or the taxpayer's death; and
• (iii) the charity must take substantial physical possession or make use of the property for an exempt purpose, such as an exhibition.

If any of these prongs are not met, then the income and gift tax deductions previously taken will be recaptured with interest.

5. Recapture of Tangible Personal Property Charitable Deductions if No Related Use
Gifts of tangible personal property to a charity qualify for a fair market value deduction only if the donee organization could use it for its exempt purpose. Nevertheless, some charities still decide to sell the property rather than retain it for furtherance of its exempt purpose. The PPA now requires a recapture of tax benefits if a charity sells donated tangible personal property within three years of receipt from the donor. There is an exception that allows the charity to make a statement under penalty of perjury that the related use has become impossible and therefore the tangible personal property had to be sold. This provision applies to donations of related use property after September 1, 2006.

6. New Appraiser and Valuation Rules
The value of property over $5,000 given to charity, that is not publicly traded on a securities exchange, must be substantiated by an appraisal. The PPA creates new accuracy-related penalties for these appraisals. The appraiser must have an appraisal designation from a recognized organization, the appraiser must have otherwise met comparable education experience requirements, regularly perform appraisals, have verifiable education and experience with the type of property appraised, and may not be prohibited from practicing before the IRS. The penalties for incorrect appraisals are the greater of $1,000 or 10% of the understatement from a substantial or gross valuation misstatement, with a cap of 125% of the appraiser's gross income from the appraisal.

7. Increase in Private Foundation Excise Taxes
Excise taxes may be levied on a number of improper transactions involving private foundations and public charities. With respect to private foundations, excise taxes may be levied on self-dealing between the private foundation and a prohibited party, failure to distribute income as required, excess business holdings, jeopardizing investments and taxable expenditures. Generally, the excise taxes are now twice what they were under prior law.

8. Expanded Base for Private Foundation Net Investment Income Excise Tax
Private foundations are generally subject to a 2% excise tax on net investment income. The PPA broadens the definition of investment income earned by private foundations, which will have the effect of increasing the tax liability owed by private foundations.

9. IRS Notification Requirement for Small Charities
Charities with gross receipts of less than $25,000 have not been required to file with or report their income to the IRS. As a result of the PPA, they will now be required to file a report containing their legal name, mailing address, Web site address, taxpayer identification number, name and address of a major officer and evidence of the continuing basis for their tax-exempt status.

10. Charitable Gifts of Taxidermy
Under prior law, individuals were permitted to donate stuffed animals to charity and deduct both the taxidermy costs and the cost of the expedition on which they were hunted. Under the PPA, the charitable deduction will be the lesser of the taxpayer's basis in the taxidermy or fair market value. Basis is limited to the cost for preparing and mounting the item. The cost of the hunting expedition will no longer be deductible.

Please feel free to contact Wendy S. Goffe (206.340.9633 or wgoffe@grahamdunn.com) should you have any questions on this topic.

Increasingly, American adults reside in a household as members of an unmarried couple. These couples may be heterosexual or homosexual, or these couples may not be involved romantically in any way, such as siblings or close friends. Furthermore, these couples may wish to include each other and their respective descendants as part of their estate plans.

The laws governing inheritance, and the taxation of inheritance, are generally designed to benefit the married couple.1 State and federal laws contain default statutes giving spouses rights, including the right to handle funeral arrangements, rights under intestacy statutes, and Social Security survivor benefits. As of December 31, 2003 there were 1,138 federal statutory provisions under the United States Code pursuant to which marital status is a factor in determining eligibility for rights, benefits or privileges.

To continue reading the entire article, please view the attached document; Estate and Charitable Gift Planning for Unmarried Couples.

As you may have heard through the media, our client, Valley Bancorp, Las Vegas, Nevada, has agreed to merge with Community Bancorp, Las Vegas, Nevada in a 75% stock/25% cash deal worth $46 per share. We helped take Valley Bancorp public in 2004 at $18 per share.

The transaction is expected to be completed in late 2006. It is an interesting in-market acquisition that further fuels the continued growth of both of these companies since their inception in the dynamic Las Vegas market.

This marks the third whole bank deal in Las Vegas in the past year, two of them by Community Bancorp and the fourth deal in Nevada during that time period. Graham & Dunn has acted as counsel in two of those transactions. We would be pleased to discuss your comments and questions about this transaction and its implications for your institution and the industry in general.

Please feel free to contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) or Kumi Yamamoto Baruffi (206.340.9676 or kbaruffi@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.

Most executives are aware that the American Jobs Creation Act of 2004 (AJCA) added a new section to the U.S. tax code (Section 409A) that dramatically changed the way the tax laws apply to nonqualified deferred compensation (NQDC) plans. While it has been almost two years since that section was added, the IRS has still not issued final guidance on important aspects of the law. All of this was an outgrowth of Enron and related abuses. Because Section 409A cannot be fully implemented without such guidance, executives and their tax advisors have been in a holding pattern, making few (if any) changes to NQDC plans in existence at the time Section 409A was enacted and adding only general language to new NQDC plans to address the possible application of Section 409A.

With a deadline of December 31, 2006 to bring NQDC plans into compliance with Section 409A looming and final IRS guidance expected to be issued towards the end of summer, that is about to change. It is now time to get serious about amending your NQDC plans.

How Does Section 409A Affect NQDC Plans?
Section 409A requires a NQDC plan to satisfy certain requirements relating to the timing of distributions, acceleration of benefits and making the election to defer compensation under the plan. If the plan fails to satisfy those requirements, plan participants are subject to immediate taxation on the amounts deferred, as well as to a penalty equal to 20% of such amount and interest on unpaid tax.

The Broad Reach of Section 409A
The reach of Section 409A is extremely broad. It brings within its ambit contracts, methods or arrangements that apply to one individual, as well as those that apply to a broad group of individuals. Moreover, it applies to arrangements that have not been traditionally treated as deferred compensation. For example, nonqualified stock options and severance pay may be subject to the requirements of Section 409A in some instances. Many executives are surprised to find that the new law applies to some of the arrangements in which they participate.

Your NQDC Plans Must be Amended by December 31, 2006
The IRS originally announced in Notice 2004-1 that NQDC plans had to be amended by December 31, 2005 to comply with Section 409A and that prior to amendment a plan must be operated in good faith compliance with the provisions of Section 409A and the notice. In September of 2005, the IRS extended the deadline for amending plans and the good faith compliance period to December 31, 2006.

Final IRS Guidance is Expected to be Issued Soon
Taxpayers are still awaiting final IRS guidance on important aspects of Section 409A. The IRS had previously indicated that such guidance would be issued this summer. It now appears from remarks made by senior IRS representatives that the guidance will not be available under September 2006.

What you Should be Doing Today
Because of the number of NQDC plans that are affected by Section 409A and the relatively short-time that taxpayers will have to amend their plans once final IRS guidance is issued, it is possible that the IRS may extend the deadline to amend NQDC plans again. At this time, however, we are not aware of any IRS announcements (either formal or informal) that it intends to do so.

Therefore, employers must be prepared to amend their NQDC plans by the December 31, 2006 deadline. Employers who have not already done so should begin the process immediately by taking the following steps:

• Identify all plans, arrangements and agreements that fall within the broad reach of Section 409A. As discussed above, many arrangements that are not traditionally considered deferred compensation arrangements are nevertheless subject to the new law.
• Identify specific provisions in plans, arrangements and agreements that will have to be amended to comply with Section 409A. It may be possible to begin drafting new or replacement language in some instances, based on the limited IRS guidance currently available.
• Determine if board or other corporate approvals of amendments will be required and make sure that the individuals who will have to give such approvals are aware of impending amendments.
• Begin communicating with employees to make sure that they are aware of impending amendments. Although it may not be possible to describe with specificity the changes that will be made, employees can at least be made aware of the fact that the new tax law may require amendments to current arrangements.

We monitor developments in the NQDC area closely and will provide you with additional information through Cyber-Grahams as we become aware of them. In the meantime, please feel free to contact Denny F. Wong (206.340.9612 or dwong@grahamdunn.com), or any of your normal Graham & Dunn contacts, if you have any questions or if we can be of assistance to you. We encourage you to be proactive in addressing these pending changes to avoid last minute surprises.