LITIGATION RISK AND BRAND MANAGEMENT - BKR EMEA · Litigation Risk and Brand Management for...

LITIGATION RISK AND BRANDMANAGEMENT

Charles Hewetson and Carolyn Pepper

27 June, 2017

EGIANc/o DRT & Partners

Chaussee Romaine 10221780, Wemmel

BELGIUM

CHARLES HEWETSON & CAROLYN PEPPER

Charles Hewetson

Charles is co-chair of Reed Smith’s Global Regulatory Enforcement Group. He is also a former Vice-Chair of Reed Smith’s Global Litigation Department. He has over 25 years experience in Professional Negligence Claims, Regulatory Investigations and Enforcement Proceedings, Financial Services Disputes and General Commercial Litigation. His areas of expertise include:- Professional Negligence Claims – Charles has acted for one of the big four accountants on a number of Professional Negligence Claims over many years (across their range of practices, including claims relating to audits, tax and pension liabilities) Regulatory Investigations/Enforcement – Charles has acted for one of the big four accountants on a number of regulatory issues/investigations over many years (including regulators in both the UK and the US) Financial Services Disputes Commercial Litigation.

Carolyn Pepper

Carolyn is a partner at Reed Smith with more than 20 years’ experience working in commercial disputes, media and intellectual property. Her areas of expertise include: Intellectual property and media including trade mark, copyright, breach of confidence, libel, privacy and advertising. Carolyn’s intellectual property practice includes transactional work such as rights, IT and IP contract negotiations as well as litigation Commercial Litigation Inquiries (in particular in the media industry) Social media Publishing and broadcasting (television and radio)

Reed Smith International Offices

Litigation Risk and Brand Management for International Accounting Networks

I. Litigation Risk – Charles Hewetson

A. Claims against networks

B. Claims against member firms

II. Brand Management – Carolyn Pepper

I. Litigation Risk for International Networks


• The backdrop

• The current claims environment/recent cases

• Key points/key developments

• Practical risk management steps



• The backdrop

• The goal/the tension

• Internal pressures

• External pressures



• The current claims environment/recent cases

• Current environment/backdrop

• Claims receding? Time to relax?

• Parmalat (Deloitte/Grant Thornton)/Banco Espirito (BDO)

• Recent cases

• McIntire v China Media Express Holdings (2013) (Deloittes)

• Madoff (2014/2016) (KPMG)

• NQ Mobile Inc. (2015) (PwC)

• Passport special opportunities SO (2016) (Deloitte)

• Firefighters v Citco (2016) (Grant Thornton)



• Key points/key developments

• Section 20A Securities and Exchange Act (for control person liability)

• [From NQ Mobile] Setting professional standards and principles under which individual offices operate does not equal control

• [From NQ Mobile] Control must be over not just the primary violator, but also over the transaction in question – clear documentation that the coordinating entity does not practice accounting or provide auditing or other services or conduct business for third parties and that member firms cannot act as agents of the coordinating entity significantly assisted;

• [From NQ Mobile] Parmalat distinguished – in that case, senior personnel in Deloitte US had held key positions at the coordinating firm;


• Vicarious liability/agency

• [From Madoff], the fact that KPMG International had the right to make management and policy decisions and advertise KPMG as a single cohesive unit of financial services firms able to provide top quality services across borders was not sufficient;

• [From Madoff], what was required (to establish agency/vicarious liability) was an agreement that would manifest the international entity’s consent to allow the member firms to act as its agents, subject to its control;

• [From McIntire], the Plaintiffs set out a litany of features of the Deloitte network that allegedly gave the international firm control over the Hong Kong entity that produced the relevant audit opinion*, but still the Court found that the key missing piece was any suggestion that the international firm was the person/entity with ultimate authority over the mis-statement, including its content and how to communicate it;

• [From the Fire Fighters case], the Court expressly distinguished the Parmalat finding (in relation to two Grant Thornton entities where in that case, GT Italy was a subsidiary of Grant Thornton International) with this latest case where the two Grant Thornton entities were different legal entities incorporated in different countries). Further, in this recent case, there was no suggestion in this case that International took any action in preparing the audit reports in question.




Avoid

• “One firm” marketing

− “our worldwide offices”

− “our partners”

− “our global revenues exceed…..”

• Implying that umbrella organisation

− provides services

− is a joint venture or partnership

− guarantees the services provided by member firms




Do

• Promote independent statements

• Use sole recourse(e.g. “you agree that we have sole liability for the services we provide to you pursuant to this engagement. You undertake not to bring any proceedings or make any claim whatsoever against any other member of the X International network in relation to services provided pursuant to this engagement”.)

• Opinions to be signed off in name of local firm only

• Avoid direct interference with the work of members

• Confine quality reviews to “historic” matters

• Encourage clarity about contractual arrangements

e.g. Engagement terms –

• Extinguish pre-contractual representations

• Clarify who will provide the services and assume the risk

• Manage the risk of “project management” role

Litigation Risk for International Networks

• Manage referral risk

e.g. “if we introduce you to another member of the X International network, we do not accept any liability for work which they carry out on your behalf – you must make your own contractual arrangements directly with them.”

• Sub contracting – living the brand

• Check local laws – can it be done?

• Sole recourse in client contract

• Indemnity

• Check PI

• Quality commitment from providers

• Scope of work

• Client billing

• Client ID/AML

• Jurisdiction

• Preferred approach

• Website /marketing

− Network does not itself provide professional services

− Each member is independent and solely responsible

• Standard terms

− Role of network – facilitation and coordination

− Independent and solely responsible

− Not responsible for other advisers

− Proportionality clauses/liability caps – where governing (local) laws allow

• Constitution

− Confirm International’s role

− Avoid language suggesting control

− Indemnities and insurance.




• e.g. suggested wording “X International is a leading worldwide network of independent accounting and consulting firms, providing a comprehensive portfolio of audit, accountancy, tax and advisory services.

• X International does not deliver services in its own name or otherwise. X International and its member firms are not part of a worldwide partnership.

• X International does not accept any responsibility for the commission of any act or omission to act by, or the liabilities of, any of its members. Each member firm within X International is a separate legal entity and cannot act as agent of X International or any other member firm.”

• Clarify

• Be clear on:-

− What you prefer

− What you can do

− What you will not do

• Make sure relationships are documented



• The current landscape/current areas of focus

• Recent cases/key points to note



• the current landscape/current areas of focus

• Some very significant cases out there over the last year or so, e.g. the US$5.5bn claim against PwC arising from the collapse of Taylor, Bean & Whittaker for negligent mis-statement following the collapse of that mortgage lender; similarly, the claim against PwC for the collapse of MF Global – the backdrop is not universally benign.

• The growth in the introduction of class action lawsuits to many more countries around the world as part of government bolstering of investor protection laws is a further risk to what otherwise might be perceived as a relatively benign environment.

• Focus of cases? Figures from the US suggest that 60% of cases relate to tax advice; 18% to audit services; 11% to consultancy and 11% to other areas.

• In terms of the UK, the pattern is unlikely to be much different. The more noticeable feature is the significant increase in FRC investigations since its revamp in 2013 and the lowering of the threshold test (“breach of relevant requirement” standard).

• As to new risk areas, we would highlight cyber security where professional services firms are seen as the soft under belly of the financial world (given the toughening up of controls within financial institutions).



• Recent cases/key points to note

• Scope of duty/breach of duty – Swynson v. Lowick Rose; Mehjoo v. Harben Barker & Others; Barclays & Others v Ernst & Young

• Bannerman disclaimers upheld (Barclays v Grant Thornton)

• Limitation of liability clauses (Maharaj v Johnson (2015))

• Illegality defences (Moulin Global Eyecare; Jetivia v Biltau UK)

• The dangers of sophistication! (Altus v Baker Tilly)

MANAGING BRANDS AND REPUTATION RISK

Carolyn Pepper

• What is a brand?

• Examples of accountancy firm branding

• Brand management risks and legal solutions

What is a brand?

• an accumulation of emotional and functional associations

• a promise that a product or service will perform to a customer’s expectations

• a quality symbol

• protectable IP and

• a balance sheet asset

Key words

• Emotional association

• Promise

• Quality

• Asset

Creating an emotional connection

• Build a Better working world

• See Beyond the Numbers

• Large enough to meet all your financial needs, small enough to know your name when you call

• Big Firm Capability, small firm personality

• Proud to be Boring Accountants

• Passion Works Here

Promise

• Delivering on the Promise

• Consider it done

• You can count on our work

• Focus on growing your business, trust the accounting to us.

Quality

• Rock solid financial support.

• Integrity + Accuracy

• We see the details.

• We won’t stop until the job is done.

Asset

• According to Brand Finance’s Brand Directory, the four largest accounting and auditing firm brands are worth approxiately $60 billion

Brand Management Risks

• Trade Mark/Brand Dilution

• Trade mark infringement

• Reputational damage

Trade Mark/Brand Dilution – damages the “emotional connection”, “promise” and “quality” signifiers of a brand

• Hoover

• Jacuzzi

• Frisbee

• Escalator

• Yo-Yo

Legal Solutions

• Make sure your marks are registered

• Police your brand!

Trade Mark Infringement – damages the “promise” and “quality” attributes of a brand

Copycats:

Louis Vuiton Dak LOUISVUI TONDAK

Legal Solutions

• Cease and desist letters

• Injunctions and legal proceedings


• Use of your brand in unauthorised way by a rogue member of the network

Legal Solutions

• Ensure that you have thorough brand guidelines in place and that they are easily accessible to members of the network

• Incorporate your brand guidelines into your licence agreements

• Consider taking action against those who refuse to follow guidelines


• Continued use of brand by a former member of the network

www.subwayuncovered.com

Legal Solution

• Ensure your licences have appropriate termination provisions drafted extremely widely to catch any form of use (whether it would constitute trade mark use or otherwise)

• Cease and desist letters

• Legal proceedings

Reputational Damage – damages the “emotional connection” to your brand

Corporate Hate sites and Facebook pages – sucks, ihate etc

“This Site has received 19,212 hits from [the company’s] corporate offices. This Site has received 3,299 hits from [the company’s] lawyers.

• This includes hits to this site's previous location* Hits from [the company’s] lawyers only includes hits from law firms that have been involved with suits against this site.”

https://www.youtube.com/watch?v=HwDj1O8N4PI

Reputational Damage – damages the “emotional connection” to your brand

Legal Solutions

• Consider whether a legal solution is the best solution

• Trade mark infringement action

• Domain name recovery

• Report to social media sites/ISP

• Malicious falsehood/defamation action

• Do nothing

The Lawyer’s Three Golden Rules of Brand Management

• Register Your Rights

• Enforce Your Rights Proactively

• Use them or lose them!

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