There’s No Such Thing As Free Money

n 2009, President Obama signed the American Recoveryand Reinvestment Act (“ARRA”) designed to stimulatethe American economy. Part of this bill is the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act. The HITECH Act is in part designed to stimulate the healthcare industryinto switching from a paper-based medical records system to an electronic medical records (“EMR”) system. $17.2 billion in Medicare and Medicaid incentives have been allocated to eligible providers who are “meaningful users” of EMR technology. For

example, starting in 2011, physicians, hospitals and healthcareproviders who are “meaningful users” of certified EMRtechnology will receive up to $44,000, which will be paid outover a five-year period in the form of medical incentivepayments. The maximum payment in the first year is $18,000(2011 and 2012) and bonus payments decline each subsequentyear, to be phased out in 2016.

On July 13, 2010, the Department of Health and Human Services(“HHS”) published its final rules on “meaningful use” andEMR standards. During the first year (Stage I) of adoption,physicians must comply with fifteen, and hospitals fourteen,core objectives. Eligible providers must use certified EMRsoftware, which must include the ability to send compliantelectronic prescriptions to pharmacies. Providers must be ableto electronically exchange health information with labs, hospitals,providers and payees. Providers must also be able to submitclinical quality measures. Physicians must also choose five froma list of ten additional criteria to implement in 2011-2012.

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A Newsletter from Shumaker, Loop & Kendrick, LLP Fall 2010

The Risks and Rewards whenImplementing Electronic MedicalRecords Systems

By Erin Smith Aebel

11 E-DiscoveryUpdate

14 Workout ofCommercialLoans

17 RecentDevelopments inHealth Care Reform

22 SLK News6 Dodd-Frank Act4 Tax Breaks forSmall Businesses

By Douglas Cherry

The 15 core criteria for physicians

1. Use computerized physician order entry

2. Implement drug and allergy interaction checks

3. Generate and transmit permissible prescriptions electronically

4. Record demographics

5. Maintain an up-to-date problem list of current and active diagnoses

6. Maintain an active medication list

7. Maintain an active medication allergy list

8. Record and chart changes in vital signs

9. Record smoking status for patients thirteen years old or older

10. Implement one clinical decision support rule

11. Report ambulatory clinical quality measures

12. Upon request, provide patients with an electronic copy of their health information

13. Provide clinical summaries for patients foreach office visit

14. Capability to exchange key clinical information electronically

15. Protect electronic health information through the implementation of appropriatetechniques

Physicians must also choose five from a listof ten additional criteria to implement in2011-2012.

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Electronic Medical Record Systems, continued

Providers must be able to electronicallyexchange health information with labs,hospitals, providers and payees.

In January 2011, clinicians may begin theninety day process of using a certifiedrecord per meaningful use requirements.Attestation begins in April 2011 and CMSpayments in May 2011. If a healthcareprovider is considering applying for thesestimulus funds, there are other legal andpractical considerations that go beyondcomplying with the “meaningful use”regulations.

Implementation of EMR Systems andthe Unique Nature of Software Projects

The implementation of EMR systemsfrequently involves complex software andproject management considerations.Software projects often go over budgetand fail to meet deadlines, sometimes byseveral hundred percent. Resultingdamages could easily run into the millionsof dollars.

Healthcare organizations and physicianstypically consider "off the shelf" softwareor SaaS (Software as a Service) models tohandle separate business functions. Often,its physicians and administrators wantto integrate, control, and track allfunctions -- from scheduling to billing topatient follow-up -- using one softwaresystem. This is typically accomplished byselecting a core product, adding somespecialized programs, and creatingenough custom software to make the partsoperate together. When a core productcannot be found, it must be custom-designed or several products must beintegrated. It is the authors’understanding that there is currently no“one-stop” solution that addresses allfacets of the healthcare process or of thecore criteria listed above.

As a general rule, the more customizedthe software or the more integrationrequired, the greater the risk that creatingthe new EMR system will be problematic.If a system has been successfully created

or implemented by the same vendor forsimilar healthcare providers a great manytimes before, chances are low that theproject will spin out of control in bothtime and expense. As the amount ofcustomization or the size of the systemincreases, the risk escalates.

Software system construction is uniquebecause software is intangible andproblems can be elusive. For example, ifthe first floor of a proposed office buildingis too small to support larger upper stories,the flaw is obvious and can be addressedquickly. But flaws in the early design ofsoftware are often not necessarily evidentand may not be fixed until it is too late.Any deviation from rules and proceduresfor good software selection, design,configuration, and testing can harm theproject substantially. Mistakes made earlyin the project tend to do more damagethan those made later. Projects that moverapidly (and cheaply) through early phasesmay be most at risk. What appears to beearly success may actually be a sign ofpoor project management.

Certain steps, or disciplines, in softwaresystem creation are designed to preventerrors, inconsistencies, and the need forlater changes. These include a thoroughinitial analysis of the client's needs,rigorous workflow and software design,effective training, strict standards,enforced methodology, and multiplelevels of testing. When any of these areneglected to focus on system"production," the resulting EMR systemmay be riddled with errors.

Trying to implement these disciplineslater in the project may actually createmore errors and inconsistencies, and theproject may deteriorate into chaos as the"to do" list grows along with the budgetand project staff. The project enters intoa spiral of endless complications and goesout of control. For example: data enteredinto the system cannot be retrieved, datais retrievable but corrupt, patientpayments/information are lost, or billingis inaccurate. At that point, the healthcareprovider suffers losses not only fromhaving a poor system, but also fromresulting damage to its business andreputation.

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It is important to consult legal counselearly in the process to discuss andstrategize important safeguards andpreventive measures to avoid the trapsassociated with the implementation ofthese types of projects. The attorneyshould have a thorough understandingof the software process, familiarity withapplicable law (including the UniformCommercial Code) and litigationexperience in software performancedisputes. This involves the ability toidentify the reasons a software projectcan fail, which include bad projectmanagement techniques, inadequategathering of requirements, poor projectimplementation, and a lack of testingplans or technical expertise.

Preventative Measures to AvoidCommon Pitfalls

To avoid these issues and problems,project planning should be carefullystrategized:

• The organization should assign orengage a project manager (PM) with aclear understanding and broadknowledge of EMR applications. This PMshould work closely with the vendor PM.Both PMs should have experience withmulti-department and multi-vendorimplementations. If the PM skill is notavailable in-house, the organizationshould consider engaging a third-partyconsultant PM to plan and manage theeffort. If a PM is only temporarilyengaged, then he or she should mentoran internal resource so that the knowledgeis retained, as post implementationstruggles are common.

• Careful vendor selection, using aplanned request for proposal process, iscritical. There are many resourcesavailable regarding vendors, such asfeedback from prior implementations.

• A good contract, which clarifiesexpectations in the software implemen-tation process, is key. It will clearly defineall parties’ responsibilities and contain aclear and measurable list of projectdeliverables (tangible outcomes) andmilestones. It will also detail the functionand performance of deliverables, ratherthan using vague and immeasurabletechnological terms. If deliverables ormilestones are not met, the penaltiesshould be explicitly laid out in theagreement. Payment should not beupfront, but should be staggeredthroughout the project life-cycle basedon client approval of deliverables. Bewary of one-page flat-fee proposalsbefore requirements are gathered, or acontract that does not account for changeorders or acceptance procedures.

• “I paid for it, so I own it” is a commonmisconception in the realm of softwarecopyright (and intellectual property ingeneral). Ownership of intellectualproperty, by default, will lie with thethird party vendor, unless specificlanguage to the contrary is included inthe agreement. Do not spend hundredsof thousands of dollars on a softwaresystem to later discover that you onlyhave a non-exclusive license to use thesoftware with no right to modify thesystem without the vendor’s approval(which may be contingent on furtherpayment).

• Often counsel is consulted late incontract negotiations as an effort to geta “legal signoff” of the contract. Theapproach is problematic as anyrecommended changes to a contract latein the negotiations can raise red flags orslow the process. Counsel should beinvolved as early as pre-contractactivities, such as vendor or third-partyconsultant selection.

• If multiple vendors are used, then anoverall project plan or project chartershould be documented and agreed uponby all. The plan will articulate scope andapproach, and clearly define measures ofsuccess in order to manage expectationsfor the overall project.

• It is not realistic to agree to a deliverabletimeline without the vendor firstunderstanding the project requirements.

• Always allow for timeline flexibility.Most software projects go over time.

• Understand that changes in require-ments are inevitable. “Scope creep” (thechange in a project's scope after the projectwork has started) should be managedwith change orders and careful processes.

• Involve all members of the healthcareteam in the process.

• Enter the implementation process witha mindset that the EMR system shouldnot just “computerize” current businessprocesses, workflows and procedures, butshould improve them. The flow ofinformation in most hospitals and doctors’offices is not as efficient as it could be.Before the implementation occurs,workflows should be carefully analyzedfor deficiencies and improvements.Everyone from the administrators to thestaff should be open to changes, as thenew EMR system will surely impact nearlyevery business process. No software canmatch all of your current methods exactly.Taking the foregoing steps, which includea well-defined project plan and detailedagreement, are important to make surethat your EMR project is on time and onbudget.

For additional information, contact Erin SmithAebel at eaebel@slk-law.com or Doug Cherryat dcherry@slk-law.com.

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New Legislation Provides Tax Breaks forSmall Businesses

n September 27, 2010 President Obama signed into law the Small Business Jobs Actof 2010 (the “Act”), which contains a number of tax breaks and incentives for smallbusinesses designed to spur job growth.

The Act seeks to encourage businessinvestment by increasing and expandingthe election to fully deduct the cost ofcertain depreciable business assets placedin service in 2010 and 2011 under IRCSection 179. Under prior law, a businesscould elect to fully deduct the cost ofcertain depreciable assets placed in service

in 2010 up to amaximum of$250,000. Thededuction wasreduced dollar fordollar to the extentthe total amount ofqualifying propertyplaced in serviceexceeded $800,000during 2010. In2011 the maximumamount that could

be deducted under IRC Section 179 wasscheduled to decrease to $25,000, withthe dollar for dollar phase out beginningat $200,000.

The Act increases the maximum amountdeductible under IRC Section 179 to$500,000 in 2010 and 2011, and increasesthe phase out threshold to $2 million. Inaddition, the Act expands the definition

By Tom Cotter

of qualifying depreciable businessproperty to include certain leaseholdimprovements, restaurant property andretail improvement property.

The Act also extends additional first yeardepreciation for 50% of the cost of certainproperty, most notably computersoftware, leasehold improvements andMACRS property with an applicablerecovery period of 20 years or less. Thespecial first year depreciation deductionexpired at the end of 2009, but the Actextends the same to property acquiredand placed in service in 2010.

In addition, the Act assists small businessowners by allowing persons subject toself-employment tax to deduct the costof health insurance for themselves andtheir dependents for purposes ofdetermining net earnings from self-employment. Previously, the cost of healthinsurance was only deductible forpurposes of computing adjusted grossincome, not for purposes of computingself-employment income subject to self-employment tax.

Small business owners also benefit fromthe provisions of the Act that provide (1)the general business credit for certaintypes of expenditures under IRC Section38 will not be subject to alternativeminimum tax for the 2010 tax year and(2) the carry-back period for generalbusiness credits determined in the 2010tax year is increased from one to fiveyears.

Those considering converting a so-called“C corporation” that is subject to tax atthe corporate level to a flow-through “Scorporation” that is taxed only at the

shareholder level may want to delaydoing so until 2011. Normally, a Ccorporation that converts to an Scorporation is subject to a special “built-in gains” tax on any asset that has a valuein excess of its adjusted tax cost basis atthe time of conversion if the corporationsells the asset during the ten year periodfollowing conversion. For conversionsduring 2009 and 2010, the built-in gainstax period was shortened from ten yearsto seven years. For conversions occurringin 2011, however, the period is shortenedto five years.

Other noteworthy provisions of the Actallow for exclusion from taxable incomeof 100% of the gain on the sale of certainsmall business stock, as defined underIRC Section 1202; the removal of cellphones from the definition of “listedproperty” under IRC Section 280F andan increase in deductible start-upexpenditures incurred in 2010 andthereafter from $5,000 to $10,000.

Of course, in this era of fiscal restraint,every tax break is accompanied by oneor more provisions to offset the loss inrevenue. The most significant revenueraiser in the Act is yet another increasein the reporting requirements for business.Generally speaking, any trade or businessthat pays more than $600 in the aggregateto one payee in the course of its trade orbusiness during the tax year must file aninformation return with the IRSidentifying the payee and the totalamount paid. Usually this isaccomplished on an appropriate Form1099. Earlier this year, an importantexception to this filing requirement waseliminated by the health care reform

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legislation, which made the reportingrequirement applicable to payments madeto corporations. This will substantiallyincrease the paperwork burden imposedon businesses, and has generatedconsiderable controversy.

The Act further expands the reportingrequirements for payments exceeding$600 in the aggregate during the tax yearby extending it to those engaged in rentalreal estate activity. The new reportingrequirement is applicable to paymentsmade in 2011 and thereafter. Theoretically,the reporting requirement will improveenforcement and compliance with the taxlaws and raise the additional revenueneeded to offset the tax breaks affordedsmall businesses by the Act.

For additional information, contactTom Cotter at tcotter@slk-law.com.

• That there are millions of private businesses in the United States.

• A large number of these are owned by individuals who expect to retire or dispose of their business management

responsibilities in 10 years or less; and

• Most of these individuals have no clearly defined business succession plan or exit strategy.

A business owner may have several options for business succession planning. One of these is sale of the business to some or all of the business’s employees.

From the Owner’s perspective, a sale to employees may be beneficial because:

• Employees are the best market for the business. They are likely to be motivated purchasers;

• There is an opportunity for continuation of corporate cultureand business values – continuity of operation; sale to employeeskeeps the business rooted in the community; and

• Management transition can be thoughtfully conducted over a period coinciding with a gradual or installment sale.

Two forms of business succession by sale to employees are favored in publicpolicy and under federal income tax law the employee stock ownership plan(ESOP) and the employee cooperative.

ESOP’s are fairly well known. They are subject to precise regulation andrequire legal counsel with particular training, skills and experience in theapplicable corporate and tax issues.

Employee cooperatives are less well known and understood as a vehicle forbusiness succession, but they should always be on the “choice of entity”list for a business owner who is looking for an exit strategy. Employeecooperatives are less expensive to implement and maintain than ESOP’s,and they are more flexible in design and operation. They are not regulatedas are ESOP’s, but they, too, require legal counsel with particular skills andexperience in the corporate and tax matters that are unique to cooperatives.

Shumaker attorneys can provide creative and well-informed counsel in thedesign and implementation of ESOP’s and employee cooperatives.

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Brief Overview of the Dodd-Frank Act:

Updating Financial Regulation

n July 21st of this year,President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). As most commentators have noted, the Act constitutes the most significant change to

the regulation of financial institutionssince the 1930s. This Act mandatessignificant studies and the promulgationof regulations, by some measures up to240, necessary to implement thelegislation. Significant discretion has beenshown to the banking regulators and the

Securities andExchangeCommission,among others, tofully implement thelegislation, and itwill be years beforewe fully under-stand its impact.

Due to the length(over 2,300 pages)and complexity ofthe Act, this article

will merely highlight a number of themore important provisions and will bedivided into sections referencing changesimpacting banks and bank holdingcompanies, securities reform, andcorporate governance and compensationreforms impacting public companies.

1. Banks and Other FinancialInstitutions

The Act generally maintains the existingstructure for banking regulation, unlikesome of the original proposals thatdiscussed extracting retribution from theFederal Reserve and other regulators forhaving “failed” to properly monitor andaddress the problems that existed infinancial institution oversight. The FederalReserve will continue to regulate bankholding and financial holding companies,as well as state “member banks,” theFDIC will continue to insure the depositsof financial institutions and regulate andoversee “non-member” state charteredbanks and the OCC will continue to beresponsible for the examination andoversight of national banks. State bankingregulators still will have the authority to

charter financial institutions as well. Theone casualty among the bankingregulators is the Office of ThriftSupervision (“OTS”), the regulators of“thrifts.” It will be eliminated with itsprincipal duties transferred to the OCCfor federally chartered thrifts, the FDICfor state chartered thrifts and the FederalReserve for holding companies of theseinstitutions. While existing thrifts will begrandfathered and allowed to continueto exist, commentators speculate that dueto the increased penalties for violation ofthe qualified thrift lender test and othertighter restrictions, many of theseinstitutions will convert to national banks.In addition, many commentators havesuggested that the other regulators willpenalize former OTS-charteredinstitutions due to the perceived “lax”regulation previously imposed upon themby the OTS.

By Tom Blank

The Act grants to the FDIC authority toliquidate failing bank holding companiesand related affiliates of banks.

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The Act also creates the FinancialStability Oversight Council which wasestablished to protect the United Statesfinancial system from systemic risks.The Council will consist of 15 membersrepresenting banking, securities andinsurance regulators with the Secretaryof the Treasury serving as Chairperson.The principal goal of the Council is toprovide oversight for the entire financialsystem of the United States. In additionto the Council, the Act grants to theFDIC authority to liquidate failing bankholding companies and related affiliatesof banks with significant procedurallimitations.These two provisions wereincluded in the Act in an effort to avoidthe type of situation created by AmericanInternational Group (“AIG”), which hadmany different component parts andmany different regulators, with no oneseemingly in charge of the entireorganization.

One of the more meaningful actionstaken in the Act is the creation of theBureau of Consumer FinancialProtection, an autonomous agencywithin the Federal Reserve. This Bureauhas been established to consolidateexaminations for consumer compliancefor banks with $10 billion or more intotal assets and certain other entitiesincluding mortgage brokers. The rulescreated by this Bureau will applygenerally to all banks, regardless of size,with enforcement for smaller banks leftto bank regulators. While paydaylenders, check cashers and certain othernon-bank financial firms will beregulated by the Bureau, auto dealersand pawn brokers escaped suchoversight. Commentators have notedthat the impact of the Bureau could beone of the more significant aspects ofthe Act. The creation of the Bureau wasone of the more contentious issuescontained in the legislation. For a while,it appeared that the Bureau would be

created as a truly independent entity, butin the end, the Bureau was housed underthe Federal Reserve. Because of the factthat significant consumer protectionlegislation already exists and is enforcedby various bank regulatory entities, therewas some question whether the newentity, with its proposed initial $850million budget, was necessary. There issome concern that the creation of theBureau will burden consumer lendersand further contract the lending in thissector resulting in some parties leavingthis service entirely.

The Federal Office of Insurance (“FOI”)was created as a new entity housedwithin the Treasury Department toreview insurance matters other thanhealth, long-term care and cropinsurance. Initially, this Office ofInsurance is intended to engage ininformation gathering and monitoringthe insurance industry in the country asa whole. The Office is required to delivera report to Congress within 18 months.Many had pushed for the creation of afederal oversight of insurance, which iscurrently regulated at the state level. Itis unclear whether the creation of theFOI is a precursor to the federalregulation of insurance intending topreempt state authority.

The Act also reforms mortgageunderwriting and provides certain anti-predatory lending restrictions. The intentof this portion of the Act is to requirelenders to ensure that a borrower is ableto repay a home loan by verifying theborrower’s income, credit history andjob status (what a novel concept) andban payments to brokers for steeringcustomers to more highly pricedproducts.

Interestingly, the Act, notwithstanding itsbreadth, did not deal with the resolutionof Fannie Mae or Freddie Mac. Manyhave deemed this to be the greatest failingof the Act noting that the projectedexposure for these entities now ownedby the government ranges as high as $500billion. Apparently, attempting to reignin these entities was not something thatwas politically possible in the effort tohave the legislation passed this year.

Finally, the Act permanently increased to$250,000 per account the depositinsurance provided through the depositinsurance fund. Interestingly, the increasewas made retroactive to January 1, 2008,which will mean that depositors who lostmoney in institutions resolved prior tothe implementation of this increase bythe FDIC in October 2008 (such asIndyMac) will be protected.

2. Securities Reform

One of the provisions in the Act thatprobably has received greatest press isthe so-called “Volker Rule” named afterPaul Volker, former Chairman of theFederal Reserve. The intent of this Ruleis to limit the ability of banks and financialinstitutions to participate in proprietarytrading. While this is likely to impact onlythe most significant financial institutionsin the country, it will have a meaningfulimpact upon those entities. Banks will beallowed to invest only up to 3% of their“Tier 1” capital in hedge funds, and maynot own more than 3% of any one fund.To some extent, this provision attemptsto turn back the Gramm-Leach Blileylegislation which effectively abolishedthe Glass-Steagall Act in 1999. This activityhas provided significant revenue to thelargest financial institutions in the countryand there is some belief that this limitation

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Dodd-Frank Act, continued

will cause those institutions to segregateproprietary trading into different entities.Derivatives regulation is another aspectof the Act that will impact larger financialinstitutions. First, the Act forces to anover-the-counter clearing market asignificant portion of the derivativesindustry in an effort to be moretransparent and stable. It also requires aseparation of certain derivative or swapactivities from the bank itself into a non-depository affiliate.

Securitizations also have been dramaticallyimpacted by the Act. Recognizing thatsecuritization of various assets, some ofwhich proved to have little or no value,was a significant contributing factor tothe economic meltdown, the Act wouldrequire banks to maintain at least 5% ofthe credit risk for any securitizations. Thisprovision known as “skin in the game”is intended to make certain thatinstitutions are not able to make a quickbuck by securitizing worthless assets andmoving on. Finally, the Act imposes strictnew standards limiting the conflict ofinterest of credit rating agencies.Previously, Standard & Poor’s, Moody’sand Fitch were paid by the varyinginvestment bankers seeking ratings forinstruments that they were in the processof selling. This conflict of interest isdeemed also to have contributed to thefinancial meltdown due to the seeminglygenerous ratings provided to nowseemingly worthless assets.

The Act also modifies the definition of anaccredited investor for purposes of privateplacement offerings. Previously, thedefinition included the individual’sprincipal residence in determining if heor she met the minimum $1 million networth threshold to constitute an

accredited investor. The Act nowspecifically excludes the person’s primaryresidence in that measure. Additionally,the Act mandates that the SEC review thedefinition of accredited investor withinfour years from the adoption of the Actand every four years thereafter. There issignificant concern that the SEC will moveto drastically increase the minimum networth and income tests provided inRegulation D, which have not beensignificantly modified since its originaladoption in 1982.

Finally, in the securities areas, and ofinterest to brokers, dealers, registeredinvestment advisors and trust companies,the SEC is obligated to undertake a studyreviewing the standard of care for personsproviding “personalized investmentadvice” to “retail customers.” The SEC’stask is to determine whether the“fiduciary standard” typically applied tofiduciaries and RIAs should be imposedupon brokers and dealers as opposed tothe “suitability standard” which currentlyis imposed. Not surprisingly, this proposalhas garnered significant comment tothe SEC.

3. Corporate Governance andCompensation Reforms

In addition to specific actions affectingfinancial institutions as noted above, theAct implements a number of corporategovernance and compensation reformsfor all public companies. First, all publiccompanies will now be required to haveadvisory (non-binding) votes taken attheir annual meeting concerning paypackages. In 2010, there wereapproximately 80 companies who soughtshareholder advisory votes regarding

compensation plans, and an additional650 companies whose “say on pay” voteswere mandated due to the fact that theyhad participated in the Troubled AssetRelief (“TARP”) Program. The Act willmandate that companies both take thevote and address in its proxy statementwhat action they will take if a majorityof the shareholders vote against a paypackage.

The standards for independence oncompensation committee members hasbeen heightened and is similar to thatprovided for audit committees. Thecommittee itself, as opposed tomanagement of the company, is requiredto retain any outside compensationadvisors. The Act provides that anyExchange (NYSE, NASDAQ, etc.) will berequired to delist a company that fails toconform to these practices within oneyear.

Clawbacks have been expanded.Originally a result of the Sarbanes-OxleyAct (“SOX”) and reinforced under TARP,Clawbacks will now be required of allexecutive officers, as opposed to only theCEO and CFO as required under SOX.The Act requires that an executive repayhis or her employer or former employer,on a three-year lookback standard, forany “material noncompliance” withfinancial statement preparation asopposed to the higher “misconduct”standard imposed under SOX. In the areaof compensation disclosure, the Actmandates disclosure of median pay of allemployees compared to that of the CEOand requires that the proxy statement orannual report contain a chart comparingexecutive compensation to stockperformance over a five-year period.Some commentators have noted that thiscould result in a short-term, as opposedto longer-term, outlook for a company’scompensation practices, which may not

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be desirable. Finally, the SEC recentlyadopted regulations that would allowpersons with a greater than 3% ownershipof a public company that have maintainedthat ownership position for three yearsor more to place nominees in thecompany’s proxy statement. This proxyaccess rule was to have become effectivefor larger companies in 2011 and for allsmaller reporting companies beginningwithin three years. However, due to alawsuit filed by the Business Roundtableand the Chamber of Commerce, the SECon October 4, 2010 stayed theimplementation of this new rule. It isunclear when this matter will be finallydetermined, but commentators feel thatthe rule will not be in place for the 2011proxy season.

As noted in the introduction to this article,many of the provisions of the Dodd-FrankAct will be subject to interpretation,regulation and rule making for manyyears. However, as you can see from thisbrief review, the Act will have a significantimpact upon the financial system in theUnited States. As is true with anylegislation enacted in response to aperceived systemic failure (such as SOX),the Act may be deemed to have gone toofar in some instances, while avoidingdealing with the Fannie Mae and FreddieMac looming issue. Please note that thereare a number of additional provisions ofthe Act not addressed in this article dueto their complexity and limitedapplicability. Stay tuned for what theregulations and rule makings do for theimplementation of the Dodd-Frank Act.

For additional information, contactTom Blank at tblank@slk-law.com.

Supreme Court Decidesthe Bilski Case

Laws of nature, physical phenomena, and abstract ideas arewell established as ineligible for U.S. patent protection.A process, however, is eligible for protection. But, what ifthe process is a business method, specifically a computerizedmethod of hedging risk in the commodities market? Manyhad hoped that the U.S. Supreme Court would take thisopportunity to throw out these types of computerized methodsand conclude they are no longer eligible for patent. Instead,the Court concluded that the recognized standard for patentingsoftware — that is, whether the process is tied to a machineor changes an article into a different state or thing, alsoknown as the “machine-or-transformation (MOT) test,” —isn’t the sole test for deciding whether these businessmethods are eligible for patent consideration.

Thus, the Court appears to have broadened the standard forbusiness method patent eligibility. Although Bilski’s inventionwas ultimately judged a mathematical formula and hence,an unpatentable abstract idea, the Bilski holding shouldreaffirm the business of business method patents.

By Michael Myers

A

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Single Member LLCs in FloridaLose Asset Protection Feature

reason many have chosen to form limited liability companies overcorporations to hold their assets has been theasset protection feature.

Prior to the Florida Supreme Court’s June 2010 decision in Olmstead et. al. v. FTC, 35 Fla L. Weekly S 357

(2010), under Florida law a judgment creditor of a member of an LLC whodesired to satisfy the judgment from hisdebtor’s LLC interest could obtain onlya “charging order” against the debtor’sLLC interest. The charging order is a lienon the interest and requires distributionsfrom the LLC to be redirected from the

member to thejudgment creditoruntil the judgmentis satisfied. Thecreditor could nottake ownership ofand sell the interestto satisfy thejudgment. Thecharging orderremedy originatedin common law toprotect non-debtor

partners from being forced unwillinglyinto partnership with a creditor of adebtor-partner.

By contrast, a judgment creditor of ashareholder of a corporation can takeownership of and sell the debtor’s sharesof the corporation to satisfy the

By Ed McGinty

judgment. This rule is codified inmodern statutes that provide for theassignee of corporate shares to succeedto all of the rights of the shareholder,including voting rights, and creditorrights statutes, such as Fla. Stat. 56.061.

In Olmstead, the Court was faced withthe issue of providing the Federal TradeCommission with access to thedefendant’s assets to allow for therecovery of profits from his fraudulentactivities. The defendant’s assets wereembedded in LLCs in which thedefendant was the sole member. Unlikethe Florida partnership and limitedpartnership statutes, the relevant FloridaLLC statute did not expressly state thata charging order was the exclusiveremedy for a judgment creditor withrespect to a LLC interest. Consequently,the Court ruled that a charging orderwas not the exclusive remedy. The Courtruled that an LLC was a type ofcorporate entity and that an ownershipinterest in an LLC is personal propertyreasonably understood to fall within thescope of “corporate stock,” allowing theFTC to take ownership and control ofthe single-member LLC. This ruling isinconsistent with the general theory ofthe Florida LLC Act and with the FloridaIncome Tax Code and the Florida UCC.It is unlikely that the Court’s intentionwas to expose multi-member LLCs tothis type of remedy for creditors ofmembers. But until the law is clarifiedand fixed by subsequent case law or,preferably, legislative correction, theholding nevertheless does expose them

to that risk. Until that time, those seekingto organize closely-held businesses andreal estate ventures as Florida LLCs woulddo well to consider alternatives such asFlorida limited liability limitedpartnerships, which benefit from statutesmaking a charging order the exclusiveremedy for a judgment creditor, ororganizing LLCs under other states’statutes that expressly provide that acharging order is the exclusive remedy,such as Alaska, South Dakota or Nevada.

For additional information, contact EdMcGinty at emcginty@slk-law.com.

Shumaker attorneys have extensiveexperience in representing clients indefending or pursuing claims ofinvestment fraud.

For additional information, contactMichael Taaffe atmtaaffe@slk-law.com orPeter Silverman atpsilverman@slk-law.com.

Peter’s recent case was highlightedin The New York Times athttp://www.nytimes.com/2010/10/10/business/10whistle.html?r=2&hpw=&pagewanted=all

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lectronically stored information (ESI) is animportant and valuablesource of evidence. More than 90% of an organization’s documents are created,edited, accessed, communicated, and stored electronically without ever being printed. With this trend

towards the paperless office, there is moreto discover in an organization’s networkof servers and computers than in its dustyfiling cabinets. How do you retain andmanage ESI? What ESI are you obligatedto keep? Once you anticipate litigation,what are your obligations to preserveESI? These are a few important questions

that should be considered indeveloping defensible documentretention and preservation policies.You should also keep in mind thefollowing principles:

1) "Disk space is cheap…let's saveeverything" is a commonmisconception

A defensible document retention policyis grounded in principles of good-faithpreservation. Unless required bycontract or statute, there is norequirement that an organization saveall types of ESI, nor is it cost-effectiveor strategically wise to do so. Insteadof a save-all mentality, you should take

E-Discovery Update:Emerging Principles Regarding

Document Retention and Preservation

There is no requirement that an organizationsave all types of ESI, nor is it cost-effectiveor strategically wise to do so.

EBy Dawn Floyd

By Douglas Cherry

www.slk-law.com

E-Discovery Update, continued

a proactive approach to documentretention with a focus on what informationshould be retained, where and why itshould be retained, and for how long.Consider that everything you keep maybe potentially discoverable if relevant toa lawsuit. For instance, the informal, terseand blunt nature of emails or online postscan be a gift to opposing attorneys and ascourge on your organization. Also, it canbe very costly to have to search throughyears (or even decades) of electronicdocuments to respond to litigationdiscovery requests.

2) A good document retention policycan save money and headaches downthe road

With the short timetables that often comeabout from litigation, the urgent demandson the parties and their informationtechnology departments may besignificant. A good document retentionpolicy can help you quickly and efficientlylocate documents relevant to any litigation.

3) Parties are obligated to produce ESI

ESI is a category of informationdiscoverable by an opposing party,regardless of how much ESI exists. If aparty has any ESI relevant to litigation itmust be produced, even if the informationexists in another form such as paper. Thelaw does recognize some exceptions toproduction of certain ESI, including whereproduction would result in undue burdensand costs. However, this ESI must still bepreserved.

4) If you think you might be sued, stopdocument deletion (including email)and start preserving

Courts have different standards as to whenthe duty to preserve ESI arises. Mostcommonly, the duty to preserve arises“when a party reasonably anticipates

FASB Proposes ExpandedDisclosures Regarding LossContingencies

Companies with audited financial statementswill want to stay alert this autumn for ananticipated final revision of the standardsgoverning disclosure of “loss contingencies.”Seeking to improve corporate financial statementdisclosure regarding potential losses that couldarise from pending lawsuits, regulatory actionsand other situations deemed to constitute “losscontingencies,” the Federal Accounting StandardsBoard (“FASB”) has spent several years exploringrevisions to what was originally known asStandard No. 5, and is now codified at AccountingStandards Codification Topic 450. A discussiondraft issued in June 2008 caused considerableconsternation in the legal and businesscommunities about the expanded scope ofdisclosure. In the ensuing time, it appeared frominternal FASB discussions that the final FASBproposals would be lessened. The latest exposuredraft issued on July 20, 2010, however, revivedthe debate. For example, the FASB proposal callsfor disclosure of accrual amounts in the aggregatethrough tabular reconciliation, remotecontingencies that are potentially severe, andcertain insurance coverage. By the August 20,2010 comment deadline, the U.S. Chamber ofCommerce and the Association of CorporateCounsel, among other notable commentators,severely criticized the proposal, which wasoriginally scheduled to take effect for issuerswith fiscal years ending after December 15, 2010.Commentators have recommended, among otherthings, that the FASB delay the effective date;however, if a final Standard revision is adoptedand effective according to the FASB’s proposal,companies will have considerable work to reviewinternal practices in light of the new disclosurerequirements, which will potentially affect theaudit response procedures between a company’slawyers and its auditors.

For additional information, contact ReginaJoseph at rjoseph@slk-law.com.

litigation.” The Pension Committee of theUniversity of Montreal v. Banc of AmericaSecurities, LLC, 685 F. Supp. 2d 456, 466(S.D.N.Y. 2010). At this point, you shouldimmediately contact counsel, suspendany document retention policy and putin place a “litigation hold” to ensure thepreservation of relevant documents. Id.Also, you should identify all key playersand ensure that their electronic andpaper records are preserved, cease thedeletion of email, preserve the recordsof former employees that are in yourpossession, and preserve backup tapes.Id. at 471.

5) Failure to preserve relevant ESI canhave significant consequences

Failure to preserve relevant ESI can leadto being found negligent and/or grosslynegligent, may result in monetarysanctions, and may result in an adversejury instruction regarding spoliation ofevidence. Id. at 496-97. Sanctions maybe imposed if you engage in carelessand indifferent collection efforts afterthe duty to preserve arises, regardlessof whether there was an intentionaldestruction of evidence. Id. at 463.

Developing and maintaining defensibledocument retention and preservationpolicies can be accomplished through ateam approach involving outsidecounsel, inside counsel, management,and information technology personnel.Legal counsel can be particularly usefulin strategizing and assisting with thedevelopment of a document retentionpolicy, determining when the duty arisesto preserve documents (either by statute,contract or for litigation), drafting aparty’s written litigation hold notice,and ensuring that the party is meetingits preservation obligations under thelaw of the relevant jurisdiction.

For additional information, contactDoug Cherry at dcherry@slk-law.com orDawn Floyd at dfloyd@slk-law.com.

13

legalupdate

Netgear dodged a holding of infringementon most of its products because noticeletters sent to Netgear prior to the lawsuitwere not sufficient to establish theknowledge and intent elements ofcontributory and induced infringement,respectively.

In what may be the most significant portionof its opinion, however, the court held thata district court may rely on an industrystandard in analyzing infringement. Thecourt stated that it still agreed that patentclaims should be compared to the accusedproduct to determine infringement, but ifan accused product operates in accordancewith a standard, then comparing the claimsto that standard is the same as comparingthe claims to the accused product.

welcomeRyan D. ElliottColumbus, AssociateEnvironmental

Rachel B. GoodmanSarasota, AssociateLitigation

Peter E. KrebsToledo, AssociateCorporate

Richard D. RogovinColumbus, Of CounselCorporate, Litigation

Nicholas T. StackToledo, AssociateLitigation

new Federal Circuit decision may make patent infringement of certainproducts easier to prove when the product implements a standard covered by a patent. In Fujitsu v. Netgear (decided September 20, 2010), three patents covered different aspects of wireless communications technologies. Netgear was accused of contributoryand induced infringement—that is, basically, knowingly providing a component to an infringing product when the component has no other noninfringing use. It was asserted that Netgear infringed by implementing certain wireless networking functions, like sending and receiving messages between a router and a laptop, by not obtaininga license from the patent holders who claimed exclusivity to the

communications standards. The standards were adopted to ensure interoperability ofthese types of devices.

The impact of this case may be especiallyfelt in lawsuits involving contributoryand induced infringement involving IT.It would seem that infringement in thepresence of an applicable standard maybe easier to prove. A litigant may notneed to analyze complicated code, forexample, to determine and convincinglyargue infringement. If a district courtconstrues the patent claims and finds thatthe reach of the claims includes anydevice that practices a standard, thenthis can be sufficient for a finding ofinfringement.

For additional information, contactMichael Myers at mmyers@slk-law.com. Shumaker attorneys regularly file

patent applications for clients withrespect to newly developed plantvarieties.

For additional information,contact Robert Pippenger atrpippenger@slk-law.com.

www.slk-law.com

I. THE PROBLEM

Lack of Liquidity in the Banking SystemResults in a Tightening of Creditand Creates a Severe Recession

The unprecedented recession that befellthe American economy commencing inthe Fall of 2007 and from which we arejust beginning to emerge has createdextraordinary problems for all commercialenterprises that rely on the use of credit

to conduct businessoperations. Thepresent calamitymanifested itself ina bank liquidityfreeze whichreduced lending toa trickle. The lackof credit in turnaffected generaleconomic activity,reducing therevenue streams

which businesses rely upon to payexisting indebtedness, includingindebtedness secured by commercial realestate. This destabilizing feedback loophas put both prudent and recklesslymanaged businesses under extremeeconomic pressure which in most casescould not have been anticipated. Thediscussion which follows deals with theworkout of loans secured by commercialreal estate.

II. HOW THE PROBLEM IS ADDRESSED

Self-Knowledge and Succinct AnalysisEstablishes a Game Plan for the FavorableWorkout of Existing CommercialIndebtedness

The severe recession obviously presentsthe business owner with challenging issuesrelating to both complying with obligationsunder existing financing documents andobtaining extensions of credit. The adviceon how to deal with these issues is simpleand direct: Self Knowledge combined withRealistic and Succinct Analysis.

The best thing a pressured business ownercan do at this juncture is to put into practicethe ancient maxim: “Know Thyself.” Donot engage in denial of economic realities.Do not panic and delay the tough economicanalysis that will eventually need to bemade. If it is determined that financialcovenants of loan documents are beingviolated or that problems making loanpayments are being experienced or willsoon be inevitable, it is essential thatpreparations are made to proactively andproductively reach out to one’s banker.Time is of the essence in this process. Ananalogous case study which illustrates theneed to take swift action when there is asudden downturn in economic activity isthe demise of Wachovia, N.A. It has beenwidely commented that had TARP(Troubled Asset Relief Program) beenenacted a number of days earlier, Wachoviamight have survived as an independentbank. The short delay in enactment of this

legislation rendered Wachovia unable todefend itself against a run on its deposits.The takeaway from the Wachovia caseis that even obtaining forbearance ofshort duration from one’s lender canmean all the difference in preserving thevalue of one’s enterprise.

III. You May Have More Influence onYour Banker than You Think

While it would be imprudent to implythat there are magic bullets which willmake one’s banker go away (he/she willnot), the banking industry is also underpressure and for many reasons isincentivized to work with a borrowerwho is prudently managing its economicdifficulties. Among the reasons are:

1. Collateral values are in decline. If abank can “kick the can” down the road,wait for collateral values to improve andavoid negative impacts to its balancesheets, it may do so.

2. The Federal Banking Regulators, ina recent policy statement issued October30, 2009 (see Moses Luski, Mercy for theVanquished: Federal RegulatorsAnnounce New Policy Statement on“Prudent Commercial Real Estate LoanWorkouts” (February, 2010), availableat http://www.slk-law.com/articles/default.aspx?id=327, have encouragedbanking institutions, in the case whereloans are secured by commercial realestate, to engage in loan workouts, eventhough collateral values have decreasedor compliance with financial covenants

By Moses Luski

15

have deteriorated. Where reasonablyprudent repayment terms can bearranged, banks are encouraged to workout existing loans secured bycommercial real estate.

3. Commercial bankers may be underdeadline pressures at the end of eachquarter to evaluate their loan portfolios.If they are surprised by last minutedisclosures or reporting at the very endof a quarter, they may be less likely tobe predisposed to work with a borrowerto restructure a loan. On the other hand,if a borrower proactively reaches out tohis banker earlier in the quarter to givea “heads up” of potential restructuringissues, a banker is more likely to workharder to obtain a mutually favorablerestructuring.

IV. Practical Advice

Armed with the general knowledgegained from the discussion above, aborrower seeking to work out a loanwith its banker should heed thefollowing practical advice:

• Faithfully comply with all reportingrequirements such as the provision oftax returns and financial statements.Failure to comply with theserequirements immediately raises a redflag with the bank officer who isresponsible for the loan who may inturn flag the loan as potentially troubled.

• Approach your banker with anypotential loan issues well before thepoint of missing payments. Oncepayments are missed, the bank is lesscapable of flexibility with respect to apotential loan workout. This is wherethe term “Know Thyself” has its highestapplicability. If business conditions arerapidly deteriorating, prior to reachingthe point of no return, the economics ofa business should be realistically anddispassionately analyzed.

• Have a management plan ready.Indicate to the banker, as part of a fullydocumented plan, the changes beingmade in current business operations toweather the storm and how in the interimthe business can support the existingpayment schedule or a reduced paymentschedule. Alternatively, outline an exitstrategy showing what preparations arebeing made for a sale of the business.The latter alternative may be less realisticin today’s economic climate, but may bea viable approach depending on the lineof business. This is where the savvy andexpertise of the business owner can “buy”some time for the enterprise and possiblybe its salvation. In essence, sell the bankerwith reasonable projections and realisticplanned actions, showing the businessstands a reasonable chance of weatheringthe storm.

• Consider consulting with a workoutspecialist. There are former bankers whoconsult with businesses and assist themwith developing a plan that can be soldto the bank. A capable consultant caninject a very useful level of legitimacy tothe workout process in that it establishesa banker-to-banker dialogue which can

help your bank more easily justify theproposed workout plan. Also, whendealing with less experienced bankpersonnel, an experienced consultant canin effect educate the bank on how tostructure a solution. An attorney or CPAcan also assist with this process. At theminimum, the attorney should beconsulted prior to execution of any legaldocuments to insure the documentsproperly capture the business terms ofthe deal and do not overreach to one’sdetriment. A CPA must be consulted todetermine that there are no adverse taxconsequences to the proposed workouttransaction and to suggest whether thereare more tax-efficient means of structuringthe transaction.

• Personal expenses should be carefullymonitored. If personal expenses and/orwithdrawals from the business are out ofcontrol, it will not be looked uponfavorably.

continued on next page >

The economics of a business should berealistically and dispassionately analyzed.

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V. WORKOUT TERMS:

What to Expect

There are numerous ways to restructurea loan: (a) Interest Only Period;(b) Modified Amortization; (c) ReducedInterest Payment with accrual of shortfalland excess cash flow recapture;(d) Restructure into a “good” A Note anda “bad” B Note; and (e) NegotiatedEquity Participation where the bank ispermitted to recoup deferred interest andprincipal payments upon a sale orrefinance event. The complexity of someof these structures suggests the need tohave a capable consultant or otherprofessional provide advice on whichstructure is more advantageous.

VI. What Terms to Expect on aRefinance

• Since most real property collateral isunder water, a loan extension will morethan likely be offered rather than a longterm refinance. The term of the exten-sion will typically not exceed one year.The interest rate will most likely beincreased with a base floor set and awider spread from the variable base rate.The bank may ask for a fee ranging from25 basis points to 200 basis points.Obviously, in any given case, the actualterms of the extension will be the resultof negotiations based on a unique set offacts so there are no typical terms otherthan to state it is unlikely that the termwill be extended for more than one year.

• For a Real Estate Investment Property,the chances for a longer term refinanceincrease greatly if the borrower can injectequity to bring down the loan to valueand there is sufficient rental income toservice the debt.

• For owner occupied real estate, the bankmight rely on the cash flow of the businessto provide a long term refinance withoutrequiring a reduction in principal.

VII. A Word on Loans that are Part of aCommercial Mortgage Backed Security(CMBS)

• If your loan is part of a CMBS, in orderto trigger workout negotiations it may benecessary to stop loan payments to triggerwhat is known as a “special servicingtransfer event.” Once such a specialservicing event is triggered, one is put incontact with a servicer that has authorityto make decisions on behalf of the ownerof the CMBS. Caution: “Please don’t try thisat home.” Cessation of loan paymentsshould only be made with the advice oflegal counsel.

• The typical term for a CMBS loanextension are maintenance of the sameinterest rate, one year term extension, 5percent principal reduction and anorigination fee of one to two percent.Again, there is no guaranty that these termsmay be achieved in a particular case.

VIII. Final Takeaways

• In order to successfully negotiate a loanworkout, a borrower must be able tofrankly communicate to the bank what theproblems in the business are and whatefforts the borrower is taking to mitigatethe problems. If the bank sees that theborrower is making significant efforts tohelp itself, there is a much greaterlikelihood of bank cooperation.

• Sometimes the pressures facing aparticular banking institution are so greatthat it will have little flexibility innegotiating a workout. Similarly, if abanking institution sells a portfolio loanto a third party, such party may have lessinterest in negotiations.

• If a business analysis indicates aborrower’s business cannot be saved,then it is probably better to know thissooner rather than later and bankruptcycounsel should be consulted.

• If things appear bleak or out of control,remember the mantra: “Know Thyselfand It Will Work Out.” Facing the stormwith a calm focused demeanor will yielda better result than disorganized panic.

For additional information, contact MosesLuski at mluski@slk-law.com.

Know thyself, continued

17

Grandfathered Plans

The Act imposed numerous newrequirements on the design and operationof group health plans; however, grouphealth plans maintained in existence priorto the adoption of the Act may be exemptfrom certain requirements as"grandfathered" health plans. The new

interim regulationsillustrate therequirements fora group healthplan to meet andmaintain "grand-fathered" status.

In general, a grouphealth plan may bea "grandfathered"health plan if itprovided health

insurance coverage to any individual onMarch 23, 2010 and has continuallycovered any (not necessarily the same)individual since that date. Grandfatheredhealth plans are not required to complywith some design and operationalrequirements mandated by the Act,including:

1. Coverage of Preventative HealthServices. Effective for plan yearsbeginning on or after September 23, 2010(i.e. January 1, 2011 for calendar yearplans), a group health plan may notimpose cost-sharing requirements (i.e.co-payments or deductibles) for certainidentified preventive care services.

2. New Claims and Appeal Procedures.Effective for plan years beginning onor after September 23, 2010, the requiredclaims and appeal proceduresapplicable to group health plans hasbeen expanded to include new rightsfor participants, including an externalreview or disputed claims by a third-party independent review organization.

3. Prohibition on Discrimination inFavor of Highly CompensatedIndividuals. Effective for plan yearsbeginning on or after September 23,2010, the prohibition against a grouphealth plan discriminating in favor ofhighly compensated individuals (eitherin the form of eligibility or benefits) isextended to apply to all group healthplans. Previously, the prohibition onlyapplied to self-insured group healthplans.

However, despite the exemption fromcomplying with some requirements ofthe Act, including those listed above,a "grandfathered" health plan mustcomply with some of the more knownprovisions of the Act, including:

1. Required Coverage for AdultDependents. Effective for plan yearsbeginning on or after September 23,2010, any group health plan that offerscoverage to dependent children mustmake the coverage available todependent adult children until theyreach the age of 26 years. To accom-modate this change, the exclusion from

Recent Developmentsin Health Care Reform

continued on next page >

By Scott Newsom

ith new regulations issued on a regular basis and conflictingand unclear descriptions ofhealth care reform in the news media, employers are

at a disadvantage in determining andunderstanding their obligations underthe new health care laws, as well asidentifying the available opportunities.

The President signed the PatientProtection and Affordable Care Act onMarch 23, 2010, and subsequentlysigned the Health Care and EducationReconciliation Act seven days later(collectively the “Act”). Initially, theapplication and effect of someprovisions of the Act remained unclearpending mandated descriptive andimplementing regulations. Anticipatedregulations and guidance have begunto emerge, including interim finalregulations governing "grandfathered"health plans, and interim regulationsand additional formal guidanceexpanding required internal claims andappeal procedures applicable to healthinsurance claims to include an externalreview process. These recent develop-ments are among the first publicationof regulations interpreting andimplementing the Act's provisions, andrequire immediate consideration andanalysis by sponsors of group healthplans.

W

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income for employer provided healthinsurance coverage has also beenamended. However, for plan yearsbeginning prior to January 1, 2014,coverage may be restricted to adultchildren who are not eligible for otheremployer sponsored group health plancoverage.

2. Prohibition Against Pre-ExistingCondition Exclusions. Effective for planyears beginning on or after September23, 2010, a group health plan may notimpose a pre-existing conditionexclusion on any individual under theage of 19. Effective for plan yearsbeginning on or after January 1, 2014,the prohibition against pre-existingexclusions is extended to include allindividuals.

3. Prohibition Against Lifetime orAnnual Limits on Essential HealthBenefits. Effective for plan yearsbeginning on or after September 23,2010, a group health plan may notestablish lifetime limits or annual limitson the dollar value of essential healthbenefits for any participant orbeneficiary. However, effective for planyears beginning before January 1, 2014, a group health plan may impose"restricted" annual limits on essentialhealth benefits as determined byregulations to be issued.

4. Waiting Periods Cannot Exceed 90Days. Effective for plan yearsbeginning on or after January 1, 2014,a group health plan may not impose awaiting period of more than 90 daysfor an individual to become eligiblefor coverage.

5. Prohibition Against Rescission.Effective for plan years beginning onor after September 23, 2010, a grouphealth plan is prohibited from rescindingcoverage (termination of coverageretroactively) unless an individualengages in an act, practice or omissionconstituting fraud or an intentionalmisrepresentation of material fact asprohibited under the plan's terms. Apermissible rescission will require a 30day advance written notice. Retro-activetermination of coverage is permitted forfailure to pay premiums.

To maintain grandfathered status, agroup health plan must include a noticein all participant communicationsdescribing benefits that alerts theparticipant that the plan is considered agrandfathered plan. The regulationsprovide sample language that may beused to satisfy this requirement.

In addition, substantive restrictions andlimitations exist on the changes that agrandfathered plan may make and stillmaintain its exempt status from the Act.As health insurance renewal seasoncommences for many employers, themost notable restriction is that any newpolicy, certificate or contract of insuranceentered into after March 23, 2010 resultsin a loss of grandfathered health planstatus. For example, many employersoften change health insurance providersafter a comparative shopping process asa means of controlling premium costs.This process will now result in a loss ofgrandfathered status. Notably theDepartment of Labor has issuedFrequently Asked Questions, in which itstates that further guidance will beforthcoming on this issue.

Other changes that cause a group healthplan to lose its grandfathered statusinclude:

Health Care Reform, continued

1. Any elimination of all or substantiallyall benefits to diagnose or treat a particularcondition.

2. Any percentage increase in any cost-sharing requirement (such as coinsur-ance).

3. Any increase in a fixed-amount cost-sharing requirement other than acopayment (such as a deductible or out-of-pocket limit) in excess of the "maximumpercentage increase" (medical inflation +15%) measured from March 23, 2010through the effective date of the increase.

4. Any increase in a fixed-amountcopayment, determined as of the effectivedate of the increase, if the total amountof the increase measured from March 23,2010 exceeds the greater of:

(a) An amount equal to $5 increased by"medical inflation."

(b) The "maximum percentage increase"determined by expressing the totalincrease in the copayment as a percentage.

19

continued on next page >

The President signed the

Patient Protection and

Affordable Care Act on

March 23, 2010, and

subsequently signed the

Health Care and

Education Reconciliation

Act seven days later.

5. Any decrease in the contribution rateby employers and employee organiza-tions as follows:

(a) For a contribution rate based on"cost of coverage" – a decrease of anytier of coverage for any class of similarlysituated individuals by more than 5%below the coverage period that includesMarch 23, 2010.

(b) For a contribution rate based on aformula – a decrease of any tier ofcoverage for any class of similarlysituated individuals by more than 5%below the coverage period that includesMarch 23, 2010.

6. Any addition of an overall annuallimit on the dollar value of benefits (orfor plans with a lifetime limit, theaddition of an annual limit that is lessthan the lifetime limit amount).

7. Any decrease in the dollar value ofan annual limit on the dollar value ofall benefits.

For those employers who may haveadopted a disqualifying change, the newregulations provide an opportunity foremployers to rescind certain changesadopted after the effective date of theAct, but before the issuance of theregulations, and preserve thegrandfathered status of the Plan.If the terms of a group health plan orhealth insurance coverage are modifiedafter March 23, 2010 but prior to June 14,2010, the changes will not cause a loss ofgrandfathered status provided they arerevoked or modified effective as of thefirst day of the first plan year on or afterSeptember 23, 2010, and the terms andconditions of the plan or coverage asmodified are compliant with the grand-fathered plan rules.

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exhausted the plan's internal claims andappeals procedures, and allowed toimmediately proceed to a bindingexternal review of the dispute orpotential federal court claim underERISA. As a result, valuablepresumptions and defenses may be lostand additional costs and expenses willlikely be incurred.

The U.S. Department of Labor issued atechnical release on August 23, 2010 thatcreated a "safe harbor" for group healthplans that must implement a Federalexternal review process for the planyears beginning on or after September23, 2010 (January 1, 2011 for calendaryear plans). To comply with the externalreview requirement and satisfy the "safeharbor," a plan may choose either:

(1) Compliance with procedures set forthin the technical release that are consistentwith the Uniform Health CarrierExternal Review Model Act, whichgenerally consists of the followingstandards:

a. A claimant may file a request for anexternal review within 4 months ofreceipt of an adverse benefitdetermination.

b. The group health plan must conducta preliminary review to determine thecompleteness of the request andeligibility for an external review.

c. Referral of the appeal to an accreditedindependent review organization.

d. Provisions for an expedited externalreview in certain circumstances.

(2) Voluntary compliance with a Stateexternal review processes (which alreadycurrently exists for governmental andother health and welfare plans exemptfrom ERISA).

A second technical release was issuedon September 20, 2010, that delays theenforcement of some of the claimant

notice and timing for claims adjudicationprovisions of the new regulations untilJuly 1, 2011.

Many self-insured and larger grouphealth plans adjudicate their ownbenefits claims through plan committees.These processes should be reviewedimmediately and revised in accordancewith the new regulations. Further, plancommittees responsible for claimadjudication should be educated on thechanges to claims and appeal procedures.Employers who utilize third parties toadjudicate their health plan claims, suchas a third-party administrator or healthinsurance provider, may wish toinvestigate and familiarize themselveswith the procedures utilized by theircontracted party to protect against anexpensive lawsuit or unnecessarybinding external review process.

Shumaker attorneys are activelyadvising clients on these issues andgiving presentations on the moretechnical aspects of these regulationsand the Act. If you have any questionsor would like to discuss the Act’s specificapplication to your organization andgroup health plan, please do not hesitateto contact one of our Tax and Benefitsattorneys.

For additional information, contactScott Newsom at snewsom@slk-law.com

Although some of the new regulationsappear straightforward, the practicalapplication of the grandfathered planrules has raised numerousunanticipated legal and administrativeissues for employers. In some cases,unintentional errors or inadvertentactions have already resulted in the lossof the opportunity for some employersto maintain grandfathered plan status.Employers considering whether toattempt to maintain grandfathered planstatus must be diligent and examinethe potential impact of any changes totheir group health plans.

If you desire to investigate orunderstand the availability and effectof grandfathered status for your grouphealth plan, please do not hesitate tocontact one of our Tax and Benefitsattorneys, or your regular contact atShumaker who can arrange for one ofour attorneys familiar with the Act tocontact you.

Expansion of Claims andAppeals Procedures.

On July 23, 2010, the Department ofLabor issued interim final regulationsimplementing requirements under theAct for the addition of an externalreview to the current mandatedprocedures for claims and appeals ofbenefit determinations for group healthplans, as well as an expansion andclarification of the current provisionsrelated to the review and adjudicationof claims. The consequence of failureto strictly adhere to all the requirementsof the claims and review process asarticulated under the new regulationsis that the claimant is deemed to have

Health Care Reform, continued

21

The Best Lawyers in America® 2011 (Copyright2010 by Woodward/White, Inc., of Aiken, S.C.).

M. Scott AubryJohn C. BarronNeema M. BellJenifer A. BeltThomas C. BlankMichael M. BrileyEric D. BrittonJohn H. BursonC. Philip Campbell, Jr.C. Graham Carothers, Jr.Ronald A. ChristaldiThomas A. CotterDavid J. CoyleMary Li CreasyScott G. DellerGary R. DiesingThomas P. DillonEdwin G. EmersonVivian C. FolkJack G. FynesBruce H. GordonWilliam H. GoslineDouglas G. HaynamJohn W. Hilbert, IIW. Kent IhrigJohn S. InglisRegina M. JosephJohn D. KocherKathleen A. KressPaul R. LynchJohn N. MacKayTimothy C. McCarthyMichael S. McGowanBrian N. McMahonDonald M. Mewhort, Jr.William L. PatbergMary Ellen PisanelliThomas G. PletzDavid J. RectenwaldCynthia L. ReruchaJoseph A. Rideout

congratulations

H. Buswell Roberts, Jr.James I. RothschildStephen A. RothschildMichael G. SandersonSteven G. SchemberGregory S. ShumakerJohn J. SicilianoPeter R. SilvermanJoseph S. SimpsonDarrell C. SmithLyman F. SpitzerScott M. StevensonMark C. StewartJohn L. StraubWilliam H. SturgesTheodore C. TaubJ. Todd TimmermanLouis E. TosiBarton L. WagenmanDavid F. WatermanThomas I. Webb, Jr.Martin D. WernerJames F. White, Jr.David W. WicklundSteele B. Windle, IIIDennis P. WitherellKathryn J. WoodwardGregory C. YadleyMechelle Zarou

Chambers USA 2010“Leaders in their Field”

Douglas G. HaynamNatural Resources &Environment (Ohio)

Paul R. LynchCorporate/M&A & PrivateEquity (Florida)

William L. PatbergNatural Resources &Environment (Ohio)

Darrell C. SmithCorporate/M&A &Private Equity (Florida)

Louis E. TosiNatural Resources &Environment (Ohio)

Gregory C. YadleyCorporate/M&A &Private Equity (Florida)

2010 FloridaSuper Lawyers

Anthony J. AbateErin Smith AebelSteven J. ChaseC. Philip Campbell, Jr.Ronald A. ChristaldiBruce H. GordonMark D. HildrethW. Kent IhrigJohn S. InglisErnest J. MarquartSteven G. SchemberDarrell C. SmithTheodore C. TaubJ. Todd TimmermanGregory C. Yadley

Gregory C. Yadley wasalso named a Top 100Lawyer by Florida SuperLawyers® for the fifthstraight year.

2010 FloridaRising Stars

Liben AmedieDouglas A. CherryJason A. CollierIrina J. DosoretzR. Andrew GeorgeMichele Leo HintsonAdria Maria JensenMeredith D. LukoffHunter G. NortonMaria del Carmen RamosMelissa A. RegisterMindi M. RichterMichael H. RobbinsChristopher Z. StaineSeth P. TraubKelly A. Zarzycki

Toledo BusinessJournal’s 2010“Who’s Who inArea Law”

John C. BarronJenifer A. BeltThomas P. DillonSharon M. FulopDouglas G. HaynamJohn W. Hilbert, IIMichael S. McGowanBrian N. McMahonJoseph A. RideoutStephen A. RothschildGregory S. ShumakerPeter R. SilvermanLouis E. TosiBarton L. WagenmanMark D. Wagoner, Jr.David F. WatermanJames F. White, Jr.Dennis P. Witherell

2010 Florida Legal Elite

Erin Smith AebelRonald A. ChristaldiJonathan J. EllisGregory C. Yadley

The following Shumakerwere listed in Super Lawyers®,Corporate Counsel Edition

May/June 2010

William Kent IhrigReal Estate

John S. InglisReal Estate

Gregory S. ShumakerReal Estate

Theodore C. TaubReal Estate

Barton L. WagenmanReal Estate

July/August 2010

David H. ConawayBankruptcy & CreditorDebtor Rights

Mark D. HildrethBankruptcy & CreditorDebtor Rights

H. Buswell Roberts, Jr.Bankruptcy & CreditorDebtor Rights

Peter R. SilvermanFranchise Dealership

J. Todd TimmermanIntellectual Property

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slknewsErin Aebel hosted and spoke at a LormanSeminar on Medical Records in Sarasota inSeptember. Erin also spoke to physicians,students and instructors at Ultimate MedicalAcademy in Tampa in June and to theUniversity Community Hospital OfficeManager’s Council on Health Care Reformand Provider Regulation in May.

Chad Baker was appointed to serve on theOhio State Bar Association Estate Planning,Trust and Probate Law Council.

Neema Bell was elected as the BoardSecretary of WGTE Public Media.

Jeni Belt was a presenter at the FranciscanLiving Communities Leadership Teammeeting in August.

Steve Berman was a panelist at the 22ndAnnual Insolvency Conference presented bythe California Bankruptcy Forum in May inMonterey, California. Steve was also apanelist at the 26th Annual Bankruptcy &Restructuring Conference presented by theAssociation of Insolvency & RestructuringAdvisors in June in San Diego, California.Additionally, he was a panelist at a workshoppresented by the San Diego BankruptcyForum in June.

Phil Campbell participated in the HCBAYLD 2010 State Court Trial Seminar andspoke on the closing argument.

Graham Carothers has been selected for the2011 Leadership Tampa Class.

Doug Cherry presented an IntellectualProperty overview at the Sarasota-ManateeAssociation of Legal Support Specialists(“SMALSS”) meeting in September.Doug spoke at the Florida Public RelationsAssociation’s Annual Conference in Augustin Naples, Florida and he also spoke at theSarasota Chamber’s TechFest BreakfastSummer Series.

Ron Christaldi was named Interim Secretaryof the Board of Directors of The Spring ofTampa Bay, Inc.

Jason Collier was certified in Labor andEmployment Law by The Florida Board ofLegal Specialization and Education.

Jamie Colner was elected to the ExecutiveBoard of the American Board of Trial AdvocatesOhio Chapter, effective January 1, 2011.

Jennifer Compton was a panelist for theBusiness Ethics Alliance inaugural educationworkshop in April. She discussed theimportance of ethics in the workplace and itsimpact on effective leadership andproductivity. Jennifer was also selected forLeadership Sarasota County.

David Conaway will be speaking at theNACM Fall Credit Seminar on Chapter 11Recent Trends and Strategies for Creditors,which will take place on October 20, 2010 inCharlotte, North Carolina. David also spokebefore the National Paper Packaging CreditGroup in Chicago in September and was apresenter for the Furniture ManufacturersCredit Association in May in Concord, NorthCarolina. David also participated in thepresentation of Antonio Sainz de Vicuña,General Counsel of the European CentralBank, at the Euroadvocaten Meeting inFrankfurt, Germany in May.

Tom Cotter delivered a presentation on theHiring Incentives to Restore Employment Actof 2010 to the Toledo Chapter of the AmericanPayroll Association in May.

Tom Cotter, Ed Emerson, Scott Newsom andDennis Witherell spoke at the Ohio State BarAssociation Corporate Counsel Institute inOctober on "Health Care Primer - NewDirections, Decisions, Taxes and Credits forBusiness." Karen Hockstad was the CoursePlanner.

Mary Li Creasy was the featured guestspeaker in April for the Tampa Bay Business& Professional Women "Unhappy Hour"event commemorating National Equal PayDay. Mary Li was appointed to the FloridaBar Labor and Employment LawCertification Committee for a three–yearterm.

Duane Daiker was appointed to theeditorial board of the Fidelity & SuretyDigest which is published quarterly by theAmerican Bar Association’s Fidelity &Surety Law Committee.

Dan De Leo has been certified in BusinessLitigation by The Florida Board of LegalSpecialization and Education.

Saralyn Dorrill has been elected to theAdvisory Board of the Make-A-WishFoundation of Central and NorthernFlorida, Sarasota Region.

Tim Garding was named to the Spring ofTampa Bay’s Development Council.

Jack Gillespie was appointed to the Boardof the Homeless Families Foundation.

Tammy Giroux, Michele Leo Hintson,Brian Lambert and Bob Warchola spokeat the 21st Annual Northeast Surety &Fidelity Claims Conference in Septemberin Atlantic City, New Jersey.

Bruce Gordon was elected to the Board ofDirectors of the Tampa Museum of ArtFoundation. Bruce was a speaker at theFlorida Society of Enrolled Agents, SuncoastChapter meeting, in August.

Cheryl Gordon was named to the Board ofDirectors of the Education Foundation ofSarasota County.

David Grogan spoke on "Bankruptcy inNorth Carolina" at a Lorman EducationServices Seminar in Charlotte, NorthCarolina in May.

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Gregory Haney joined the LandlordTenant Committee of the Florida Bar RealProperty, Probate and Trust Law Section.

Dan Hansen and Bill Sturges werepresenters at the Southeast SuretyConference, in April in Charleston, SouthCarolina.

Bill Heywood was appointed to serve asa Board member of WGTE Public Media.

Michele Leo Hintson has been selectedto the 2010-2011 Junior League of TampaBoard of Directors, again serving as itsLegal Chair and has also been selected toserve as the Chair of the UnlicensedPractice of Law Committee “A” of theThirteenth Judicial Circuit.

Michele Leo Hintson and Brian Lambertspoke at the 21st Annual Southern Surety& Fidelity Claims Conference inCharleston, South Carolina in April.

Karen Hockstad was elected to the Boardof Directors of the Juvenile DiabetesResearch Foundation, Mid-Ohio Chapter,for 2010-2012.

Adria Jensen and Deirdre Aretinipresented at this year’s Branch Banking& Trust Company’s 2nd Annual REOAgent Meeting.

Brian Lambert has been certified inConstruction Law by The Florida Boardof Legal Specialization and Education.

Malinda Lugo was a presenter at the USFCollege of Nursing’s Law Day 2010 heldin March and discussed legal issues facingNurse Practitioners from a transactionaland licensure standpoint. She also was aco-presenter on how to avoid medicalmalpractice claims.

Moses Luski was the featured speaker at aloan workout seminar and, with AndyCulicerto at a construction law seminar,jointly sponsored by Shumaker and the CPAfirm of Cherry, Bekaert & Holland, L.L.P.

Ed McGinty co-presented a BusinessSuccession/Sale Case Study PanelDiscussion to the Suncoast Estate PlanningCouncil at the All Children’s Education &Conference Center in St. Petersburg, Floridain April.

Scott Newsom was elected Treasurer andwill serve on the Board of Directors ofLeadership Toledo.

Cate O’Dowd was elected Treasurer andwill serve on the Board of Directors of theRaymond James Gasparilla Festival of theArts for a three-year term.

Mike Pitchford was certified as a ResidentialMortgage Foreclosure Mediator by theAmerican Arbitration Association, in affiliationwith the Collins Center for Public Policy. Inaddition, Mike has been appointed to theFlorida Bar Real Estate Certification Committeefor a three year term. Mike also joined theBoard of the Risk Management Association(RMA), Sarasota/Bradenton Chapter.

Maria del Carmen Ramos is a recentgraduate of Tampa Connection.

Melissa Register was a presenter at theEstate Planning and Probate Law Update atthe Florida Bar’s Annual Meeting in BocaRaton, Florida in June.

Michael Robbins will serve on the IsraelAffairs Committee for the CongregationRodeph Sholom.

Steve Rothschild was selected for the 2010Fellows Class of the Ohio State Bar Foundation.

Rebecca Shope has been appointed a Trusteeon the Toledo Opera Board of Trustees.

Shumaker, in collaboration with the CentralOhio Chapter of the Association of CorporateCouncil, hosted a CLE seminar for in-housecouncil in October. The seminar was held atthe Jeffers Auditorium, Nationwide Plaza inColumbus. Tom Blank, Scott Newsom, andMechelle Zarou were speakers at the seminar.

Peter Silverman was a speaker in May at theAmerican Bar Association Forum onFranchising Teleseminar and for theInternational Association of Franchisees andDealers.

Darrell Smith is a recipient of FinanceMonthly Magazine’s Law Awards forAchievement in 2010.

Lyman Spitzer was elected to the AlumniCouncil of Maumee Valley Country DaySchool for a three year term.

Christopher Staine joined the ConstructionLaw Committee and the Legislative IssuesSubcommittee of the Construction LawCommittee of the Florida Bar Real EstateProperty, Probate and Trust Law Section.

Juan Villaveces has been certified in RealEstate Law by The Florida Board of LegalSpecialization and Education. Juan waselected Treasurer and will serve on the Boardof Trustees of the Forty Carrots Family Center.

Greg Yadley was a speaker at the SecondAnnual Professional Day presented by theSociety of Financial Service Professionals atthe Tampa Bay History Museum. Greg alsopresented a program at the M&A SourceConference for Professional Developmentin Orlando, Florida in June.

Mechelle Zarou has been awarded with theOhio State Bar Foundation's CommunityService Award for Attorneys 40 & Under.

Kelly Zarzycki was elected to the Board ofDirectors of the Young Lawyers Division ofthe Hillsborough County Bar Association.

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A Newsletter from Shumaker, Loop & Kendrick, LLP

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Shumaker, Loop & Kendrick, LLP’s insights is intended as a report of legal issues and other developments of general interest to our clients, attorneys and staff. This publicationis not intended to provide legal advice on specific subjects. In particular the IRS requires us to advise you no person or entity may use any tax advice in this newsletter to (i)avoid any penalty under federal tax law or (ii) promote, market or recommend any purchase, investment or other action. Additionally, while we welcome electronic communicationsfrom our clients, we must advise non-clients who may contact us that an unsolicited e-mail does not create an attorney-client relationship, and information of non-clients whosend us unsolicited e-mails will not be held in confidence unless both parties subsequently agree to an attorney-client relationship.