(September 15, 2023) – Seyfarth Shaw LLP attorneys David Bizar
and William J. Hanlon discuss best practices for commercial
customers as large and midsize banks continue to face economic and
regulatory headwinds.
Silicon Valley Bank (“SVB”) was closed by the FDIC and
its primary prudential regulator on March 10, 2023, followed by
Signature Bank two days later on March 12, 2023 and First Republic
Bank, on May 1, 2023.1 These were the second through
fourth largest bank failures in U.S. history, First Republic Bank
with $212 billion of assets, SVB with $209 billion, and Signature
Bank with $110 billion.2
Upon the first to fall, we immediately urged increased diligence
concerning the safety and quality of banks and banking
relationships.3 We advised commercial bank customers to
review and memorialize their decisions regarding the safety of
their bank deposit funds that exceed the standard FDIC insurance
limits of $250,000 per depositor, per insured bank, for each
account ownership category, consistent with their fiduciary
duties.
Discussing and deciding this issue, so long as it is performed
with due care and in good faith, entitles fiduciaries to the
shelter of the “business judgment rule,” which is
intended to keep their decisions from being second-guessed by a
court. We also advised holders and potential drawers of letters of
credit issued by the failed banks to individually review their
situations concerning whether the letters would need to be, or
should be, replaced or not.
In the ensuing six months, while there have not been any more
large bank failures and the overall economy and economic outlooks
have improved, heightened diligence nonetheless remains warranted
for commercial bank customers.
Recently, the largest banks have written off approximately $5
billion of credit defaults (roughly double the same period last
year) and rating agencies have downgraded several mid-size bank
ratings. Rising interest rates and decreased demand for office
space are further ratcheting up the pressure on commercial real
estate. Meanwhile, the low FDIC insurance coverage limits have not
changed.
According to the Financial Times, the nation’s largest banks
have written off a combined $5 billion worth of loans in Q2 of this
year as borrowers experience the double whammy of inflation and
higher interest rates.4 The big banks are setting aside
billions more to cover more loans that could potentially go bad.
Credit card debt is the primary source, followed by office
loans.
Reuters states that “[d]eposits at the U.S. banks have
stabilized after a tumultuous period in March, when two of the
largest bank failures since the 2008 financial crisis spurred
consumers to seek safety by moving their money to large
institutions.”5
Since then, as interest rates have continued to rise deposits at
two of the largest U.S. banks have declined by 6 and 7% due to
consumer deposit outflows on consumer spending and customer
migration to higher yielding alternatives, such as certificates of
deposit.6 “While higher rates are expected to boost
earnings for larger banks, those gains will be tempered by
moderating appetite for loans at higher deposit costs …
.”7
Deloitte notes that while economic growth has slowed to a crawl
in 2023, it has not declined enough to merit the label of a
recession.8 It predicts a 60% likelihood that the
economy will nonetheless slow substantially in the second half of
2023, as lending standards are tightening and business investment
remains soft.
But it also recognizes a 40% chance that either inflation will
come back and settle in at about 6%, further damaging the U.S.
economy, and a 20% chance of a recession in which “the
already-weak economy contracts a substantial 2.4% by the middle of
2024” while “the unemployment rate rises to 5.5%, which
alleviates some — but not all — of the pressure on the
job market.”9
JPMorgan opines that “a recission appears off the table
this year” but regional banks are experiencing slower loan
growth due to headwinds to economic activity and commercial real
estate challenges are mounting.
The three major rating agencies have, in examining the headwinds
and challenges that banks are facing recently downgraded several
bank ratings.
According to Reuters:
- S&P cut its ratings on two mid-sized banks based on funding
risks and higher reliance on brokered deposits, while three others
were downgraded on large deposit outflows and prevailing higher
interest rates. - Moody’s lowered ratings on 10 U.S. banks and placed six on
review for potential downgrades. - Fitch, the last of the three chief rating agencies, projected
that several U.S. banks could see downgrades if the sector’s
“operating environment” deteriorates
further.10
As a rule, banks have not been immune from failure. There have
been a total of 565 bank failures from 2001 to 2023.11
The U.S. Government Accountability Office (“GAO”) posits
presently that particularly banks “that loaned money for
commercial real estate ventures may be feeling the pinch as many
office and business spaces continue to sit vacant in the wake of
COVID-19.”12
The GAO “found that failures of small and medium-sized
banks [during 2008-2011] were largely associated with high
concentrations of commercial real estate loans” and that
“when these banks were exposed to the sustained real estate
and economic downturn that began in 2007, credit losses on
commercial real estate loans drove them to fail.”13
“[T]his combination of aggressive growth strategies and weak
risk-management practices [was] similar to what [the GAO] found in
the March Silicon Valley Bank and Signature Bank
failures.”14
Commercial real estate loans may prove problematic for small
community banks, but industry giant CBRE does not view them as a
threat to the banking system: “Office loan losses, while
challenging for banks, are unlikely to destabilize the broader
financial system since office loans held by banks make up only 1.5%
of assets in the banking system. The banking sector’s projected
losses on all CRE loans account for only 3% of banks’ equity
capital and disclosed reserves.
We do not see this as comparable to the GFC [global financial
crisis of 2007-2011]”.15 Still, the GAO cautions
that “some businesses continue to offer employees a choice on
whether to return to their offices full time or under some hybrid
work arrangements … [which] could continue to affect demand for
office space and commercial real estate loan performance, creating
ongoing uncertainty about the risks.”16
In late July 2023 US bank regulators advanced proposals directed
at a perceived undercapitalization of the nation’s largest
banks imposed by the Dodd-Frank Act.17 The new rules
proposed by the Federal Reserve, Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation would
increase the level of capital that Large Banks with $100 billion or
more in total consolidated assets would be required to hold.
The rules, collectively known as the Basel III endgame, if
finalized after going through the standard notice-and-comment
rulemaking process which has been noticed to end on November 30,
2023, would be phased-in starting July 1, 2025, until June 30,
2028.18
According to CNN, US banks deemed systemically important
globally — or, colloquially, “too big to fail”
— would have to set aside an additional 19% of capital on
average, according to the proposal.19 Banks with more
than $250 billion in assets that aren’t considered systemically
important would see a 10% increase in the capital they’re
required to hold.20 Banks with asset levels between $100
billion and $250 billion … would see a 5%
increase.21
The Wall Street Journal reports that “With the
commercial-real estate market now in meltdown, those trillions of
dollars in loans and investments are a looming threat for the
banking industry — and potentially the broader economy. Bank
exposure is even bigger than commonly reported. The banks are in
danger of setting off a doom-loop scenario where losses on the
loans trigger banks to cut lending, which leads to further drops in
property prices and yet more
losses.”22
Our takeaway for commercial bank customers is that while the
overall economy is showing signs of resilience, the banking
landscape remains fraught with uncertainty, which calls for
continuing vigilance. The safety and quality of banks and banking
relationships should remain a regular agenda item. Whether
directors, specifically, have satisfied their fiduciary duties is a
fact-bound determination.
The Delaware courts, for example, will generally consider
factors such as how much time the directors had to review the
information, what information they reviewed, how critically they
reviewed that information, and whether they sought expert financial
or legal advice.
Delaware law typically applies a “gross negligence”
standard to determine whether directors have satisfied their duty
of care. Whosever law applies, fiduciaries should continue to stay
abreast of how economic developments may impact their deposits,
letters of credit, loans, and banking relationships. The best
practice is to thoroughly review and memorialize these inquiries to
evidence that the issues were discussed, and that the board or
other inquiring body satisfied its fiduciary duties and made a
rational business decision.
Footnotes
1. https://bit.ly/3rhgnPs
2. https://bit.ly/46fb3e8
3. https://bit.ly/3rcBiDj
4. https://bit.ly/44Owi5y
5. https://reut.rs/44TtUdG
6. Id.
7. Id.
8. https://bit.ly/469rF7a
9. Id.
10. https://reut.rs/3ZgtcWR
11. https://bit.ly/44U2i8f
12. https://bit.ly/3ZhZocc
13. Id.
14. Id.
15. https://bit.ly/46aXNaC
16. https://bit.ly/3ZhZocc
17. https://bit.ly/48uzpmn
18. https://bit.ly/3PENxBX
19. https://cnn.it/3PENw0R
20. Id.
21. Id.
22. https://on.wsj.com/46eKAxA
Originally published by Thomson Reuters – Westlaw Today.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Massachusetts Attorney General (AG) is increasing its
enforcement in the motor-vehicle-repossession space. In a January
17, 2023 Assurance of Discontinuance (AOD), the AG stated that it
is “conducting an investigation” into “entities
collecting, servicing and/or funding” motor-vehicle-secured
retail-installment contracts. The AG is focused on two primary
areas of compliance:
- the content of the pre-sale and post-sale repossession notices
and, in particular, that the notices include a statement that a
customer’s deficiency after auctioning their vehicle would be
based on the vehicle’s fair-market value; and - the frequency of phone calls to debtors and whether those calls
exceed the limits prescribed by 940 CMR 7.04(1)(f).
The current industry sweep is part of the AG’s larger focus
on the treatment of consumers who own motor vehicles. For example,
on March 9, 2023, the AG announced that she will start enforcing
the automotive right-to-repair law, which requires that automakers
provide consumers and repair shops with “telematics”
information so that independent repair shops can perform the same
services as authorized dealers.
Certain Pre-Sale and Post-Sale Notices Must Include Fair-Market
Value
The Motor Vehicle Retail Installment Sales Act governs the
repossession and sale of motor vehicles under retail-installment
contracts. The statute includes detailed requirements for the
content of pre-sale and post-sale repossession notices. In
Williams v. Am. Honda Fin. Corp., 479 Mass. 656, 669
(2018), the Massachusetts Supreme Judicial Court found that
creditors should include the following information in pre-sale
notices under § 9-614(3):
The fair market value of your vehicle will be used to reduce the
amount you owe, which is your outstanding balance plus the
reasonable costs of repossessing and selling the vehicle. If the
fair market value of your vehicle is less than you owe, you (will
or will not, as applicable) still owe us the difference. If the
fair market value of your vehicle is more than you owe, you will
get the extra money, unless we must pay it to someone else.
The court concluded that this required language should also be
added to post-sale deficiency notices. Id. at 668
(“We conclude that the notice that is required by the Uniform
Commercial Code is never sufficient where the deficiency is not
calculated based on the fair market value of the collateral and the
notice fails to accurately describe how the deficiency is
calculated.”).
The court also clarified that “fair market value”
(which is not defined in the MVRISA) is “the highest price
which a hypothetical willing buyer would pay to a hypothetical
willing seller in an assumed free and open market.”
Id. at 661 (citations and quotations omitted).
Collection Calls
The AOD also bars the company from initiating phone calls more
frequently than the limits prescribed in 940 CMR 7.04(1)(f), which
provides:
It shall constitute an unfair or deceptive act or practice for a
creditor to contact a debtor . . . [by] [i]nitiating a
communication with any debtor via telephone, either in person or
via text messaging or recorded audio message, in excess of two such
communications in each seven-day period to either the debtor’s
residence, cellular telephone, or other telephone number provided
by the debtor as his or her personal telephone number….
In Armata v. Target Corp., 480 Mass. 14 (2018), the
Supreme Judicial Court of Massachusetts interpreted this to limit a
creditor to two phone calls within a seven-day period. This
includes calls where the creditor was unable to reach the customer
and left a voicemail. While the AOD itself does not include any
analysis of how many phone calls it believes is appropriate,
presumably the AG is applying the same limitations laid out by
Armata.
How to Prepare
Companies should evaluate their collection-call practices and
pre-sale and post-sale repossession notices to Massachusetts
debtors to anticipate and mitigate any potential risks.
McGuireWoods’ state attorneys general
practice helps clients navigate these challenging waters and
advises clients on how to audit their notices and business
policies. Proactive compliance helps debt collectors limit the
scope of potential enforcement actions.
McGuireWoods would be happy to speak with your team to share
experience-based insights about these challenging issues and to
assist with responding to any inquiries from the AG.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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One of the major concerns a developing company has when leasing
space is that they may outgrow the space. As a company grows, they
will likely need more employees, inventory, and storage space. A
space that once looked big can quickly become not big enough.
Unfortunately for these companies, landlords don’t usually
grant a tenant a blanket right to terminate their lease just
because the company is growing. With that said, there are a few
ways for growing tenants to (somewhat) protect themselves so that,
when the time comes and they need more space, they can hopefully
lease space within the same building in which they are located in.
These protections often come in the form of negotiating certain
options in a lease.
Right of First Refusal:
What is a right of first refusal? A right of first refusal, or
“ROFR,” is one way in which a tenant can ensure that, if
there is open space in the building in which they currently have a
lease, the landlord will need to offer the tenant that open space
before the landlord signs a lease with a new tenant. The mechanics
of the ROFR are as follows:
- The landlord works out a deal for open space with a potential
tenant. - Once the terms are finalized, the landlord must go to the
tenant that has a ROFR in its lease and offer the tenant the same
exact terms for the open space as was negotiated with the potential
tenant. - If the current tenant is in need of space, then the current
tenant can accept the terms and expand.
This ROFR ensures that the tenant will at least have the
opportunity to lease more space in the building that it’s in,
saving the tenant various costs – such as needing to break
its lease as well as move to a new space.
Right of First Offer:
What is a right of first offer? A right of first offer, or
“ROFO,” is another way in which a growing tenant can
protect itself – to a certain degree. Like a ROFR, a ROFO
ensures that the existing tenant is offered open space in a
building before a landlord can move forward and sign a lease with a
new tenant. Unlike a ROFR, where the landlord only brings lease
terms to an existing tenant after the terms have already been
negotiated, the landlord has to negotiate in good faith with the
existing tenant prior to the landlord approaching a potential new
tenant for the open space with a ROFO; this can be very
advantageous for an existing tenant because, unlike a ROFR where
the existing tenant may be stuck with some unfavorable terms, the
existing tenant has some sort of power in negotiating terms that
work for it with a ROFO.
Many landlords are reluctant to grant tenants ROFRs and/or ROFOs
because it will impede the landlord’s ability to lease out
space in the future. However, if a growing tenant is enticing
enough, it may very well be in the landlord’s best interest to
grant one of these two options to ensure that the landlord has a
strong tenant in its property for years to come.
These are just a few examples that demonstrate the importance of
properly negotiating for a tenant’s future needs. As can be
clearly seen from the above, it is important to make sure to have
proper representation when negotiating your lease.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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When it comes to the world of property, diving into the
commercial sector can be a lucrative investment of your capital.
Like any investment though, there is an element of risk. Before
signing contracts and putting your valuable resources on the line,
it’s important to be diligent and to know exactly what
you’re getting into.
With that in mind, the Gorvins commercial property team have put
together some comprehensive insights to keep you informed as you
embark on this journey. In what follows, we’ll look at how you
can best prepare for your foray into commercial property and how to
make an informed decision on whether it’s the right investment
for you.
Is it the right time to invest in commercial property?
Market timing is both an art and a science. Before investing,
it’s crucial to gauge the health of the broader economy, as
recessions or downturns can significantly impact commercial
property values. Additionally, observe interest rates; lower rates
typically encourage borrowing and investment. Right now, in 2023,
interest rates are higher than they’ve been for a long time,
putting a big strain on borrowers.
Also, it’s always advisable to consult property experts or
financial advisors, like those at Gorvins, who can provide insights
tailored to your situation.
Remember, local factors in Stockport or the broader UK might
also play a role, so regional knowledge is invaluable.
The different types of commercial property
From bustling retail spaces to expansive warehouses, the variety
of commercial properties is immense and each has its unique
advantages. For example, office spaces might offer consistent
rental income but might be more affected by economic downturns.
What’s more, with the advent of home working, there may be less
demand for traditional office spaces in our towns and cities. By
contrast, industrial properties could have longer lease agreements,
providing more stability.
Make your choice based on what aligns with your financial goals,
market understanding, and personal comfort level. Being familiar
with the nuances of each can provide a competitive edge.
Availability of commercial mortgages
Acquiring a commercial mortgage is often more intricate than a
residential one. While they can be more flexible, they often come
with higher interest rates and larger required deposits. It’s
also common for lenders to assess the potential profitability of
the property. Do your homework: Research different lenders,
understand their terms and consider consulting with financial
experts to ensure you’re getting the best deal.
Know your competition
Competition analysis isn’t just for businesses. When
entering the commercial property market, research who else is
investing in the areas you’re eyeing. This knowledge can help
you identify market saturation points, potential pricing
strategies, and even open opportunities in overlooked areas.
Moreover, familiarising yourself with key players might provide
networking opportunities for future deals.
Find the right property
While a property might look perfect on the surface, it’s
always best practice to do your homework and delve a little deeper.
Always consider factors like structural integrity, the age of the
property, and potential renovation costs. Employing a trusted
surveyor can save you from future headaches and stop you from
making a bad investment. From a legal perspective, you should
always have a qualified solicitor look over the terms of the deal.
This will ensure that there are no lurking legal complications,
giving you peace of mind and ensuring a smoother transaction.
Get the right location
The location can make or break your investment. Think about the
potential clientele or businesses that would rent your space. A
retail shop requires foot traffic, an office space benefits from
being near transport hubs, and an industrial property needs easy
road access. Going one step further, be mindful of future city or
area development plans. An area’s growth potential can
significantly impact property appreciation.
Freehold vs leasehold
Owning a property and the land it’s on (freehold) offers
more control but typically comes with a heftier price tag. On the
other hand, a leasehold might be cheaper upfront, but the recurring
costs and potential restrictions can be limiting. Additionally, as
leasehold durations decrease, the property’s value can also
diminish, affecting resale potential. Always weigh the pros and
cons based on your long-term plans.
The importance of planning permission
Alterations to a property can increase its value, but they often
require planning permission. Navigating the maze of local
regulations can be daunting, but understanding them is
non-negotiable. Before buying, check if the property has had any
refused permissions in the past, as it can indicate potential
future issues. Partnering with a local planning expert can expedite
and simplify this process.
Key costs to consider
Before embarking on the acquisition of commercial property,
it’s important to consider the costs that such a purchase
entails. Only by seeing all pieces of the pie can you know whether
an investment is right for you or not.
- Deposit: Commercial properties usually require a sizeable
deposit, often starting at 25% - Consultancy costs: Services from surveyors, architects, or
property consultants can add to your initial outlay - Stamp duty: This tax on property purchases can vary based on
the property’s price and its intended use - Essential bills: These include utilities and maintenance
- Business rates: Commercial properties are subject to business
rates which are a kind of tax - Energy costs: With green regulations becoming more stringent,
it’s essential to factor in the energy efficiency of the
building and related costs.
A legal expert or financial planner will be best positioned to
help you navigate these considerations.
Using financing to invest in commercial property
Leveraging borrowed money can amplify your returns but also
comes with risks. Exploring various financing options, from traditional bank loans
to modern solutions like crowdfunding, can provide the needed
flexibility. However, understanding the fine print, from interest
rates to early repayment penalties, is crucial. Consultation with
financial experts can be invaluable here, ensuring you’re
well-equipped to make informed decisions.
Putting in an offer and sealing the deal
After thorough research and finding that perfect property,
it’s time to take the plunge. This stage is where negotiation
skills come into play. Being informed about recent sales or rentals
in the area can give you a bargaining edge. And remember, having a
competent solicitor by your side can streamline the process, from
the initial offer to finalising the deal.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Commercial buildings have significant untapped potential for the
deployment of solar panels, according to a new solar taskforce
which has been created by the UK Government’s Department for
Energy Security and Net Zero. The taskforce intends to
revolutionise UK solar power and its ambition is to increase solar
capacity by nearly five-fold to reach 70GW by 2035.
One of the ways the taskforce considers it can achieve its
ambition is to make greater use of the rooftop spaces that are
available on non-domestic sites such as warehouses, car parks,
schools and supermarkets.
Minister for Energy Security and Net Zero Graham Stuart
said:
“Households across the UK are already doing their bit
to provide cleaner, cheaper and more secure energy sources with the
solar panels on their roofs – but with acres of rooftop space
on car parks and supermarkets in every community, we can be doing
even more.”
The road ahead
The taskforce has resolved to publish a solar roadmap in 2024
setting out a clear step-by-step deployment trajectory.
Four key areas have been highlighted and they are rooftop solar,
electricity networks, skills and supply chains. A sub-group
specialising in each area has been established to assist in the
creation of the roadmap:
- Rooftop solar
The sub-group will concentrate on regulatory issues preventing
deployment, lowering upfront costs and raising public awareness of
solar energy. Meetings held so far indicate a particular focus on
commercial land and buildings.
Government consultations have already been launched on proposed
changes to permitted development (PD) rights to:
- Relax limitations on PD for larger commercial rooftop
installations - Introduce a new PD right for solar canopies on non-domestic car
parks.
The implementation of the changes to PD are expected to happen
in 2024.
The Government is also expected to facilitate low-cost finance
from lenders for business premises to make installation more
economically viable.
- Electricity networks
Renewable energy projects, including those for the installation
of solar panels, are being delayed because a connection to the grid
cannot be secured.
A recent inquiry by the Environment Audit Committee found that
in some instances developers are waiting up to 15 years for a grid
connection.
The priority of the sub-group will be to reduce waiting times
and expand the network.
- Skills
There is to be a focus on training and expansion of the solar
workforce to meet increasing levels of demand that in turn will
create long-term employment opportunities.
- Supply chains
Demand for energy infrastructure is growing rapidly, putting
unprecedented strain on supply chains necessary for connection to
the grid. Securing raw materials and finding the workforce for
manufacturing is also challenging. All of which is placing a
shortage on new supplies.
The sub-group will identify opportunities to secure resilient
and sustainable supply chains.
Considerations for commercial property owners
It remains to be seen whether the deployment of solar panels
will reach the levels targeted by 2035. This will depend upon how
effective the taskforce’s initiatives prove to be in overcoming
the challenges identified.
However, whether the Government achieves the target or not,
professionals, developers and businesses should be aware of changes
ahead that are expected to take place.
We have set out below our top four legal considerations for
those wishing to make use of this exciting initiative:
- Access – who owns the air space where
the solar panels are to be located? For example, have you let the
space to tenants or retained ownership and control of it? Even if
you have control over the location before undertaking any works you
need to establish if you have suitable access and all necessary
consents in order to carry them out. You will also need to
establish where cables, meters and other ancillary equipment can be
located - Planning – PD rights go a long way in
relation to solar panels and it looks like they are set to go even
further. However, PD rights may not cover all buildings and should
be carefully considered in your particular context - Costs and control – Who is going to pay
for installation and maintenance of the panels? For example, will
you be able to recoup any costs through the service charge? It may
be possible to enter into specialised agreements called power
purchasing agreements. These allow a third party to place solar
panels on your roof and as part of the agreement you get discounted
power. So they pay the costs of installation and you can use the
power generated - Use – Who can use the power generated
from the solar panels? You may for example be able to sell the
power you generate to your tenants. However, competition law may
impact this as you cannot compel them to use the energy sold by
you. You may also be able to sell some energy to the National Grid
but there are specific rules in this regard that will need to be
considered carefully.
With energy prices at an all-time high being able to produce
your own renewable energy could be an attractive solution.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Commercial contracts can be complex. In today’s digital age,
Artificial Intelligence (AI) and automation continue to
revolutionise various industries and commercial law is no
exception. AI provides enhanced contract analysis and risk
management capabilities and its systems can review contracts for
potential risks, non-compliance, and inconsistencies. Furthermore,
AI-based contract negotiation tools offer a collaborative
environment where parties can engage in real-time discussions and
secure faster agreement. Machine Learning algorithms, for example,
can analyse historical data and provide insights into negotiation
levers, including typical terms and agreement points. They can also
provide alternative clause suggestions, enhancing the flexibility
and creativity of contract agreements. AI’s unique ability to
process vast amounts of data is a game-changer in commercial
contract management and it can identify patterns and trends in
contracts, allowing businesses to make data-driven decisions.
These technological advancements offer significant benefits that
can streamline processes, reduce costs, improve efficiency, and
enhance decision-making, however, they also create serious
potential risks and challenges. As competition grows and the
demands of clients evolve, it is crucial that commercial law firms
embrace AI and automation whilst navigating these risks in order to
maintain ethical practices, protect client interests, and uphold
the integrity of the legal profession.
Data privacy
One of the main risks associated with using AI and automation in
commercial law revolves around data privacy and security. As these
technologies necessitate accessing and analysing vast amounts of
sensitive, confidential or personal information, there is a
potential for data breaches and unauthorised access. Ensuring data
privacy and security is paramount to protect the interests of
clients and businesses. Consequently, law firms in particular must
ensure robust cybersecurity measures, data encryption, and strict
access controls are in place to prevent unauthorised access or
breaches and to protect client data, maintain confidentiality, and
comply with relevant data protection regulations like the General
Data Protection Regulation (GDPR).
Bias and ethical complications
AI algorithms are trained to use historical data which may
contain inherent biases present in society. If the training data is
biased or incomplete, AI systems can inadvertently perpetuate
existing biases, leading to discriminatory outcomes. In commercial
law, this bias can result in unequal treatment, unfair business
practices, or unintended discrimination. Law firms and their staff
must exercise significant caution when implementing AI and
automation, from carefully selecting training data, regularly
auditing algorithms to address potential bias and counteracting any
negative ethical implications.
Legal liability and responsibility
Whilst AI technologies become more sophisticated and can greatly
assist in contract analysis, due diligence, and legal research,
they are not exempt from legal liability. Errors or omissions can
and will occur due to the use of AI or automation and determining
legal responsibility can become complex. For example, the
interpretation of legal texts, such as statutes or case law, often
involves nuanced reasoning and context-specific understanding. AI
algorithms, whilst efficient in processing vast amounts of data,
currently lack the ability to grasp the intricacies of legal
principles fully and this raises concerns about the accuracy and
reliability of AI-generated legal advice or judgements. Law firms
must, therefore, exercise caution when relying on AI systems and
should implement transparency measures and obtain appropriate
insurance coverage to help mitigate the risks associated with
potential legal liabilities.
Limited human oversight
Overreliance on AI and automation can lead to complacency and a
loss of critical thinking. Whilst these technologies offer
significant benefits and can augment decision-making, it should not
replace human judgement and oversight, and it is imperative that
lawyers maintain their legal expertise and exercise their
professional judgement at all times. Blindly accepting the output
of AI algorithms without questioning or verifying can lead to
costly errors, misinterpretation and oversight. Law firms and their
lawyers must strike the right balance between leveraging AI
technology and retaining their legal acumen to ensure optimal
outcomes for their clients.
Jobs at risk
This AI age is likely to cause economic disruption and job
displacement. Routine and repetitive tasks that were previously
carried out by junior lawyers or paralegals can now be automated,
and it could significantly reduce the number of billable hours for
lawyers, potentially leading to reduced demand for certain roles in
the legal industry.
About 114,000 legal jobs are likely to be automated in the next
20 years, a 2016 study by Deloitte predicted. The report predicted
another 39 per cent of jobs were at “high risk” of being
made redundant in the next two decades.
Research published this year by Princeton University, the
University of Pennsylvania and New York University suggested that
legal services is the industry most at risk from this latest wave
of AI.
Whilst the use of AI can result in increased efficiency and
reduced costs for law firms, it is vital to proactively address the
impact on human resources. As a first step, law firms should focus
on upskilling their workforce, redefining roles, and emphasising
the value of human expertise alongside inevitable technological
advancements.
The introduction of AI and automation technologies has
transformed the practice of commercial law, presenting new
opportunities to law firms and their clients but also bringing
about new and associated risks. As the commercial law landscape
continues to evolve, law firms that harness the power or AI and
automation can get ahead of the competition, deliver better results
to their clients, and foster growth in an increasingly digital
world. Striking a delicate balance between human expertise and
technological advancements is key to harnessing the potential of AI
and automation in commercial law while upholding the integrity and
ethics of the legal profession. It is, therefore, paramount that
the legal industry embraces this technological revolution to drive
innovation and propel commercial law into a more efficient,
accurate, and client-centric future.
Originally published by Insider Media.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
The Court of Appeals for the Federal Circuit (CAFC), on August
16, 2023, affirmed the U.S. Patent and Trademark Office Patent
Trial and Appeal Board’s (PTAB) decision, that the claims of
Incept LLC’s U.S. Patent No. 8,257,723 (‘723) and U.S.
Patent No. 7,744,913 (‘913) are unpatentable as being
anticipated by, or obvious over asserted prior art. The decision on
appeal considered whether the PTAB erred in its final decision that
Palette Life Sciences, Inc. (Palette) had established the
challenged claims to be unpatentable over prior art for the
inter partes reviews of the ‘723 and ‘913
patents.
The ‘723 and ‘913 patents related to improved methods
for treating cancer, particularly prostate cancer, by using
radiation. The methods described in the patents identified
introducing a filler between a target tissue and other tissue to
increase the distance between the two, which decreased the amount
of radiation received by the non-targeted tissue. Independent Claim
1 for the ‘723 patent is shown below:
Claim 1 (‘723): A method of delivering a therapeutic dose of
radiation to a patient comprising:
introducing a biocompatible, biodegradable filler between an
organ and a nearby tissue to increase a distance between the organ
and the tissue, and
treating the tissue with the therapeutic dose of radiation so
that the presence of the filler causes the organ to receive less of
the dose of radiation compared to the amount of the dose of
radiation the organ would receive in the absence of the filler,
wherein the filler is introduced as an injectable material and
is a gel in the patient, and wherein the filler is removable by
biodegradation in the patient.
Independent Claim 1 of the ‘913 patent was similar to
independent Claim 1 of the ‘723 patent. Claim 1 of the ‘913
patent contained the additional limitation that the filler was
introduced specifically between a patient’s prostate gland and
rectum. The ‘723 patent was a continuation of the ‘913
patent and both patents’ specifications were identical.
Palette Life Sciences, Inc. filed petitions for inter
partes review challenging the claims of the ‘723 and
‘913 patents as unpatentable over prior art, including U.S.
Patent No. 6,624,245 to Wallace et al. (Wallace). Wallace described
a method for the “rapid formation of a biocompatible gel . . .
at a selected site within a patient’s body.” In Wallace,
the biocompatible gels could be formed from reaction mixtures that
were injected at a specific site of a patient’s body. Further
in Wallace, the gels could be formed from polymers including
biodegradable segments or blocks that were hydrolyzed in the
presence of water or enzymatically cleaved in situ.
Wallace’s preferred application of its compositions was for use
as a “tissue sealant and adhesive.” Wallace further
explained that the compositions could be used as a large
space-filling device for organ displacement in a body cavity during
surgical or radiation procedures.
Palette’s petition at the PTAB challenged the ‘723
patent by asserting claims 1, 6, 8-12, 15, and 17-22 would have
been anticipated by Wallace, claims 1-6, 8-12, and 14-24 would have
been obvious over Wallace, and that claims 7 and 13 would have been
obvious over Wallace in combination with Griffith-Cima et al.
(Griffith-Cima). Additionally, Palette’s petition challenging
the ‘913 patent asserted that claims 1-18 and 20-24 would have
been obvious over Wallace in combination with Ein-Gal (Ein-Gal),
and that claims 19 and 25 would have been obvious over the
combination of Wallace, Ein-Gal, and Griffith-Cima. The PTAB
ultimately held for Palette, finding that the challenged claims
were unpatentable.
In first determining anticipation, Incept argued on appeal that
the PTAB engaged in a “patchwork approach,” by picking
and choosing from Wallace’s different teachings to piece
together the elements of the ‘723 claims. Incept argued that
Wallace taught a more complex, multi-step process for its gels,
which could ultimately describe numerous possible combinations and
relevant properties for the gels. However, the CAFC determined that
although Wallace disclosed options for its compositions, the PTAB
was correct in its finding that Wallace expressly described
compositions having the same characteristics, used for a similar
displacement purpose, as the compositions claimed in ‘723. The
CAFC determined that the method for the ‘723 patent introduced
fillers possessing certain general qualities that were described in
Wallace.
Incept further argued at the PTAB and on appeal that none of
Wallace’s compositions were “entirely removable by
biodegradation,” stating that Wallace at most suggested that
only a portion of the polymer may be biodegradable. Further, Incept
identified a statement that stated the compositions were “not
readily biodegradable.” However, the Court agreed with the
PTAB’s finding that Wallace’s filler composition was
biodegradable to an extent. Further, the Court found that
“removable by biodegradation” was sufficient to
anticipate the claims of the ‘723 patent. The CAFC held this to
be true regardless of the amount of biodegradation or whether
biodegradation even occurs.
Incept’s final anticipation argument on appeal highlighted
the PTAB’s failure to identify a teaching in Wallace that any
of its compositions were placed “between an organ and a nearby
tissue.” This was required by the claims of ‘723. The PTAB
stated that the compositions of Wallace could be used as a large
space-filling device for organ displacement in a body cavity.
Further, the PTAB found that Wallace’s teachings support the
notion that the compositions could be used in a variety of
different applications. As a result, the CAFC found no legal error
in the PTAB’s anticipation analysis for the ‘723
patent.
In turning to obviousness, Incept argued on appeal that the
PTAB’s analysis was in error for four reasons: (1) the PTAB
reiterated its anticipation analysis; (2) the PTAB disregarded
statements in Wallace that taught away from the claimed
biodegradable compositions; (3) the PTAB did not separately analyze
the obviousness of the dependent claims; and (4) the PTAB
improperly disregarded Incept’s evidence of commercial success.
The CAFC affirmed the PTAB’s findings for all reasons.
In (1), Incept contended that there was a “conclusory”
finding of motivation to combine, particularly with respect to the
combination of Wallace with Ein-Gal for the ‘913 patent. The
CAFC found that Wallace disclosed the use of a gel that was both
biodegradable and biocompatible. Further, the CAFC disagreed that
the PTAB’s obviousness analysis for the ‘913 was based
entirely on its anticipation analysis for the ‘723 patent. The
PTAB had found that both Wallace and Ein-Gal recognized and
appreciated the benefit of displacing tissue away from a site
intended to be irradiated. As a result, the PTAB found that in
combination, Wallace and Ein-Gal taught or suggested Claim 1’s
limitations for the ‘913 patent. The CAFC agreed with the PTAB
and rejected Incept’s arguments of conclusory findings and that
the obviousness analysis was based entirely on the anticipation
analysis.
In (2), the CAFC noted the PTAB’s argument that Wallace
taught that all the suitable polymers disclosed could become
biodegradable over a period of several months. Although the
teaching in Wallace identified that the polymers were not
biodegradable for several months, the Court took the position that
disclosure meant that eventually, these polymers would become
biodegradable. The Court therefore agreed with the PTAB’s
analysis and found that Wallace does teach or suggest
biodegradability. The Court highlighted that a preference for an
alternate invention does not substantially change the obviousness
analysis.
In (3), Palette identified disclosures in the prior art that
taught each element of dependent claim 16 for the ‘723 patent
and dependent claim 6 for the ‘913 patent, both of which
provide biodegradability time limits. The CAFC found that Incept
did not separately argue the patentability of dependent claims 6
and 16 before the PTAB. Rather, the Court indicated that Incept
merely included claim 16 of the ‘723 patent within its
arguments relating to the independent claim. For claim 6 of the
‘913 patent, the Court found that the PTAB had reached an
obviousness conclusion when applying Wallace. Thus, the CAFC found
that the patentability of these dependent claims also failed with
the independent claim.
In (4), Incept argued that clear evidence of commercial success
was presented and erroneously ignored by the PTAB. The CAFC noted
that commercial success was “usually shown by significant
sales in a relevant market.” The Court found that Incept’s
evidence including a table of “annual unit shipments” was
inadequate. By agreeing with the PTAB, the Court determined that
sales numbers were not limited to just sales, but rather included
both replacement and free sample units. Incept’s expert witness
had testified that the number of replacements and samples was
“small.” However, the PTAB found the record did not
demonstrate whether the year-over-year increase in units shipped
was attributable to increased sales, as opposed to an increase in
samples and replacements that were shipped. The CAFC agreed that
the evidence Incept provided was insufficient to demonstrate
commercial success.
Circuit Judge Newman issued a concurring-in-part and
dissenting-in-part opinion. Judge Newman concurred that Claim 1 of
both the ‘723 and ‘913 patents were invalid over the prior
art under either §102 or §103. However, Judge Newman
disagreed with the majority’s finding that the dependent claims
of the ‘723 patent were invalid. Judge Newman emphasized that
each claim must be considered as a whole, including all its
limitations. Judge Newman indicated that the majority expanded the
law of anticipation in its holding. Judge Newman stated the appears
to hold, “when the broader claim is anticipated, the dependent
claims are automatically anticipated.” Judge Newman found that
Wallace could not support anticipation of claim limitations that
were not explicitly described in the reference, particularly,
noting this expansion for the limitation concerning
“biodegradation.” Contrary to the majority, Judge Newman
gave substantive weight to the disclosure where Wallace highlighted
the difficulties and further uncertainties of biodegradation. As a
result, Judge Newman viewed the majority’s conclusion of the
narrower claims being anticipated to disregard the teachings of
Wallace. Finally, Judge Newman additionally dissented on the
Court’s holding for commercial success. Judge Newman stated
that the provision of free samples does not render the commercial
sales and market share data irrelevant in measuring commercial
success.
Application
The decision in Incept LLC v. Palette Life Sciences,
Inc., took a broader view of what is required for determining
anticipation. The CAFC determined that Wallace anticipated the
‘723 patent’s claims, including the dependent claims, by
describing the general qualities of the compositions. Further, the
CAFC found the claims to be anticipated because Wallace’s
compositions could become biodegradable and additionally be used as
a space-filling device. Part of the reason why the court took this
broader approach as to what constitutes anticipation may be because
the claims themselves were broad, or not sufficiently specific, in
the recitation of these features.
Judge Newman disagreed with the majority’s view that the
dependent claims were anticipated, indicating that the dependent
claims recited specific features, e.g., of
“biodegradation”, that were not explicitly described in
the reference. In fact, the reference disclosed that biodegradation
was uncertain. However, although Incept mentioned their dependent
claims in their appellate brief, the majority determined that these
claims failed along with the independent claim because the
dependent claims were not separately argued. Care should be taken
to provide separate arguments for the dependent claims, and to
expand on these arguments so that they are not lost during the
appeal process. Simply mentioning the dependent claims within
arguments for the independent claim may not be sufficient for
separate consideration of the dependent claims by the courts on
appeal.
Finally, evidence of commercial success should clearly provide
the facts or commercial sales and market share data. This decision
highlights that accounting information must be properly presented.
The court determined that Incept needed to provide a breakdown of
the number of units sold, as compared to those given away for free
or provided as a replacement. Further, actual evidence will likely
be given more weight than one’s expert testimony. Incept’s
expert estimated that 55% of all prostate cancer radiation therapy
treatments in the United States in 2019 included SpaceOar®
placement. However, the court found this to be insufficient and
required stronger evidence. Any other data, such as free samples
and replacements, should be accurately identified. This decision
provides a clear lesson that accounting information must be
properly presented.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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As mentioned in a previous article – “What to Know About
Commercial Leasing in Different States” – it is
important that a tenant be conscious of the state in which they are
signing a commercial lease. Different states have different laws
and standards when it comes to key lease provisions as well as the
construction and interpretation of the lease itself. This article
will continue to discuss another important difference that you may
find in a lease depending on the state in which the lease is
entered into in.
Assigning a Lease
One major lease provision that is often heavily negotiated is a
tenant’s right to assign its interest in the lease. When a
tenant assigns its interest in a lease, the tenant is giving over
to the party assuming (i) said interest, (ii) all of the
tenant’s rights, and (iii) obligations under the lease. For
example, if John assigns his lease over to Paul, and Paul assumes
the lease, Paul will now be obligated to make rent payments under
the lease, and Paul will have the right to occupy the premises.
Usually, landlord’s do not expressly grant tenants the
unfettered right to assign the lease. The reason is quite simple;
when a landlord agrees to lease a space to a tenant, the landlord
is doing so largely based on the landlord’s belief that the
tenant can make the required rent payments under the lease, is a
reputable tenant and will hopefully not default under the terms of
the lease. If the landlord would freely give a tenant the right to
assign a lease, the new tenant could potentially be a business or
person that is unable to make payments, or a tenant that the
landlord just does not trust. Therefore, landlords will often
restrict a tenant’s right to assign a lease without the
landlord’s prior written consent.
What Happens if the Lease is Silent with regard to
Assigning the Lease?
This question is extremely unlikely to ever happen, but if it
does, the answer will vary based on the state in which the premises
are located. In California and most states, if a lease is silent on
the tenant’s right to assign, the tenant may freely assign the
lease to another party. Furthermore, if there is an ambiguity in a
California lease pertaining to a restriction on transfer, the
courts will construe the ambiguity in favor of allowing the
transfer.
States do differ, however, where there is a restriction on
assigning the lease unless landlord’s consent is obtained, but
the lease is silent on the type of consent the landlord has
(meaning whether landlord needs to act reasonably). In California
the courts will likely interpret the lease to require the landlord
not to unreasonably withhold such consent; this is a very tenant
friendly way to interpret a lease and not all states take the same
approach. The laws in Minnesota differ from those in California.
Unlike in California where the courts will likely interpret a lease
so that landlord’s consent cannot be unreasonably withheld (in
the event the lease does not expressly provide the “consent
standard”), the same does not go for Minnesota. In Minnesota
if there is no standard in the lease for a landlord’s consent;
the landlord can withhold the consent for any reason
whatsoever.
The above is another example of the differences in state law
when it comes to leasing in general. When looking for a new space
and negotiating a lease, it is important to be represented by an
attorney who understands the specific laws of the state in which
the premises are located in.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The attorney-client privilege is an old and well-known
evidentiary privilege. It fosters candor between attorney and
client, protects confidential information from being revealed to
others, and ensures that the attorney can render accurate and
competent legal advice. On occasion, the privilege extends to third
parties. For instance, the “common interest doctrine” may
protect communications between business entities with common
interests in a lawsuit. A recent decision from Manhattan Commercial
Division Justice Robert R. Reed, West 87 LP v. Paul Hastings LLP,
exemplifies how instrumental the doctrine can be in commercial
practice.
Background
The attorney-client privilege, codified in CPLR § 4503(a), protects certain
communications between attorney and client. New York recognizes by
statute three categories of privileged materials: privileged
matter, attorney work product, and trial-preparation materials (CPLR 3101[b], [c], [d]). Privileged matter
includes confidential communications between an attorney and client
made to obtain or provide legal advice. Attorney work product and
trial-preparation materials include materials prepared by an
attorney that contain legal analysis or strategy, along with
statements made prior to and during litigation. The party asserting
the privilege must establish entitlement to it and show that
confidentiality has not been waived.
In general, communications between an attorney and client lose
their confidential status if they are made in the presence of, or
subsequently disclosed to, a third party. For example, the presence
of a client’s friend or relative at an attorney-client meeting
could potentially waive the privilege, as could sending an email to
someone summarizing the attorney’s advice.
The common-interest doctrine carves out an exception to this
rule. Under this doctrine, attorney-client communications disclosed
to a third party remain privileged if that party shares a common
legal interest in pending or anticipated litigation. This exception
ultimately prevented the disclosure of communications between a
limited liability company and its part owner in West 87 LP v. Paul Hastings LLP.
Analysis
In West 87 LP v. Paul Hastings LLP, the
plaintiffs—a group of limited liability companies with
various interests in a real-estate development project—sued
defendant Paul Hastings LLP for legal malpractice. Defendant had
represented plaintiffs in the execution of lease agreements for the
project, and plaintiffs claimed that defendant failed to properly
draft a rent-escalation clause in a lease for the development.
During discovery, plaintiffs produced documents that contained
communications between themselves and one of their owners, Quadrum
Global, who was not a party to the litigation. Plaintiffs moved for
a protective order to shield from disclosure several communications
between themselves and Quadrum, which they claimed were privileged.
The withheld documents included communications conveying
information provided by outside legal counsel, information obtained
from outside legal counsel to evaluate claims against defendant,
communications about drafting the malpractice complaint,
discussions about prior and anticipated legal advice, and requests
for legal advice relevant to the litigation.
Plaintiffs conceded that the withheld communications were not
actually between attorney and client, and that they did not include
their attorneys as senders or recipients. Rather, the
communications were between plaintiffs’ representatives and
Quadrum’s representatives. Plaintiffs argued that either the
attorney-client privilege, the attorney work-product privilege, or
the trial-preparation privilege shielded these communications from
disclosure.
The court agreed that the common-interest doctrine applied. It
reasoned that plaintiffs’ and Quadrum’s representatives
were “interrelated,” and their communications addressed
the pending litigation, litigation strategies, and the preparation
of materials relevant to the litigation. Thus, even these
communications between non-party entities and non-lawyers were
protected from disclosure because of the parties’ “common
legal interests” in the lawsuit.
Conclusion
West 87 LP demonstrates just
how useful the common-interest doctrine can be to commercial
litigators. A client in some corporate form, like West 87 LP, may
well share ownership interests with non-party entities who wish to
stay abreast of pending or anticipated litigation. In those
instances, the client is likely safe to share privileged
communications with such a party, so long as they share
“common legal interests” in the litigation.
Nonetheless, the prudent litigator should be cautious. It makes
sense that the court in West 87 LP applied the
common-interest doctrine to communications with a company’s
part owner; Quadrum’s ownership interest necessarily made it
interested in the outcome of the litigation. But what if Quadrum
were, for example, a subcontractor? Or perhaps a friend’s
business embroiled in similar litigation? In those instances, the
client may be better served by keeping its attorney’s advice to
itself. Otherwise, the privilege may be waived, and those
communications may be discoverable.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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In this episode, we are talking about key things to consider
when buying or leasing a commercial property with Real Estate
Solicitor, Harjot Grewal, Associate Solicitor, Lauren Philpot and Commercial Property
Partner, Andrew Fernandes.
Originally published 25 April, 2023
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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