TRUST THE LEADERS
ALSO IN THIS ISSUE
Medical Group Affiliation:
Plan to conduct your own
examination before joining a
group practice.
Rebuilding Iraq:
The final testing ground for
LSTK EPC construction
contracts?
Client Profile: Blue Bird
A close-up look at one of
the nation's leading bus
manufacturers – celebrating its
76th anniversary.
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COVER STORY
THE ATTORNEY-CLIENT
PRIVILEGE
20
As the oldest privilege recognized by AngloAmerican jurisprudence, the attorney-client
privilege still stands strong in today's
complex legal environment.
A MAGAZINE FOR SGR CLIENTS, FRIENDS AND COLLEAGUES
FALL 2003
features
Leaders
Trust
The
THINKING OF JOINING A
MEDICAL GROUP
PRACTICE?
7
TRUST THE LEADERS
If a physician is considering affiliating with
a medical group practice, there are
questions which should be asked
prior to saying "yes" or "no."
3
LSTK EPC isn't a military term; it's a
standard design-build method for
"mega" construction projects.
Has LSTK EPC outlived
its usefulness?
WHAT'S INSIDE: FEATURES
REBUILDING IRAQ:
RISKY BUSINESS
30
America’s Leading Business Lawyers
Seven SGR attorneys named to
Chambers USA Ranking Guide
Chambers and Partners, the renowned London-based
publisher of Chambers Global and Chambers UK Leading
Lawyers, released its first-ever directory of the leading
U.S. business attorneys in Q2 of 2003.
Seven SGR attorneys were named to the Guide:
- Thomas Asselin (Construction)
- Ira Genberg (Construction)
- Rodgers Lunsford III (Intellectual Property)
- Stephen O’Day (Environmental)
- Thomas Rhodes (Antitrust)
- Robert Schwartz (Banking and Finance)
- Douglas Stanford (Real Estate)
The Chambers USA Ranking Guide assessed the top
firms and lawyers in each U.S. state in more than 20
commercial areas of law. It is distinguished from other
Leaders
Trust
The
A M AG A Z I N E F O R S G R C L I E N TS , F R I E N D S A N D C O L L E AG U E S
FALL 2003
ISSUE 5
editor in chief
Terry Ferraro Schwartz
advisory board
Robert Preston Brown, Dana Grantham, Mike King,
Brett Lockwood, Anton Mertens, Dana Richens,
John Saunders, Den Webb
Smith, Gambrell & Russell’s marketing team
Connie Echols, Andy Carlyle,
Kathy Hay
contributing writers
Tammy Bouchelle, Bruce Crabtree, Stephen Forte,
Shannan Freeman, Dana Grantham, Mark McDermott,
Timothy McDowell, Jonathan Minnen, Mark de St. Aubin
creative design agency
The CreativeBeast, Inc.
Atlanta, GA
nationwide attorney listings because of the detailed
research process conducted. Researchers completed
more than 4,500 interviews with leading private practice
Trust The Leaders Magazine is published by
attorneys and key in-house counsel.
TRUST THE LEADERS
4
Promenade II, Suite 3100
1230 Peachtree Street, N.E.
Atlanta, GA 30309-3592
e-mail: editor@sgrlaw.com
WHO WE ARE
The information contained herein has been obtained from sources believed to
be reliable. The content and information in this publication do not constitute
legal advice, do not in all cases reflect the opinions of SGR or its attorneys
and are not in all cases complete or current as of the publication date. This
publication is not intended to and does not create an attorney-client relationship
or provide legal advice or legal opinion. Legal advice should be obtained from
one's legal counsel.
Permission is granted to use and reproduce this publication in whole or in part
for internal and personal reference. Except for material in the public domain,
this publication may not be further copied, modified, used or distributed, in
whole or in part, in any form or by any means without the written permission
of Smith, Gambrell & Russell, LLP. All other rights expressly reserved.
© 2003 by Smith, Gambrell & Russell, LLP
Leaders used with permission of LEADERS Magazine, Inc.
THE HIPAA PRIVACY RULE
REVEALED
14
The Health Insurance Portability and
Accountability Act of 1996 (HIPAA)
is poised to change the way the
healthcare industry does business.
A MAGAZINE FOR SGR CLIENTS, FRIENDS AND COLLEAGUES
FALL 2003
extras
Leaders
Trust
The
CLIENT PROFILE
BLUE BIRD CORPORATION
TRUST THE LEADERS
38
Celebrating its 76th anniversary, Blue Bird
leads the bus manufacturing industry
with cherished traditions.
5
SGR'S ISRAELI INITIATIVE
39
Convinced of the opportunities in Israel, SGR
has expanded its international activities to
meet the U.S. legal needs of Israeli
companies and their law firms.
WHAT'S INSIDE: EXTRAS
THE FINISH LINE
TRUSTTHELEADERS
COMPLETESITSFIRSTYEAR
With the mailing of Issue 5, our fi rm’s magazine passes the one-year milestone. For
us, Trust The Leaders has become an ideal communications tool with our clients and
business colleagues, and we look forward to continuing this innovative and successful
publishing initiative. I sincerely appreciate the commitment of SGR’s attorneys and
marketing staff, and thank our readership for their strong support. Because the law
is ever changing, I am confident our magazine will continue to have a wealth of news
and issues to cover.
We are pleased to introduce our fi rst “Client Profi le” in this issue, featuring Blue Bird
Corporation, the Georgia-based manufacturer of buses and other large motor coaches.
We plan to include client profi le stories in future issues of Trust The Leaders, and we
thank Blue Bird for its contribution to this issue.
Our cover article offers an in-depth look at the ancient and revered attorney-client
privilege, which, as the article points out, is the oldest privilege recognized by AngloAmerican jurisprudence. Since they hold the privilege, it is important for clients to
understand the required elements of the privilege for communications with counsel
to be protected.
Also in this issue:
TRUST THE LEADERS
6
• Companies all over the world are vying for coveted construction contracts
in Iraq, as the daunting task is undertaken to rebuild that country following the
recent military confl ict. Our article – “Rebuilding Iraq: How Much Risk Is Too
Much?” – reviews some of the significant risks as well as rewards of participating
in this reconstruction effort.
• An article of significant interest and importance to medical professionals is
included for those who are considering joining a medical group practice, as there
are many legal and business issues facing physicians who are newly affi liated with
an existing medical group.
• Also in the healthcare arena, we review some of the far-reaching implications
of HIPAA, the Health Insurance Portability and Accountability Act of 1996, and
specifically the much-maligned Privacy Rule.
LETTER FROM THE EDITOR
Please take a moment to look at our announcement on page 4. We are very proud
that seven of our attorneys were recently named to Chambers USA Ranking Guide of
America’s Leading Business Lawyers, which is the London-based publisher’s fi rst-ever
directory of leading U.S. business attorneys.
Terry Ferraro Schwartz
Editor in Chief
editor@sgrlaw.com
TRUST THE LEADERS
7
MEDICAL GROUP PRACTICE
A physician spends years learning the subtleties of diagnosing ailments of the
body and how to recognize almost imperceptible indicia of particular diseases.
But at some point in his or her professional career, the average physician in
the United States will confront another, equally daunting diagnostic task:
determining whether to join a physician group in private practice. The physician’s
professional training has likely left this type of diagnosis completely unaddressed.
A physician who joins a group practice, however, without examining how its
structure and operations will affect his or her participation in the group, is at
risk of entering a relationship that could prove, in the long term, both financially
and emotionally unhealthy.
A physician’s first encounter with a new patient typically includes conducting
a complete examination of the patient, obtaining the patient’s personal medical
history to determine whether there is any sign of current illness or future
trouble. A similar encounter is warranted with any group practice which the
physician contemplates joining. This article contains some of the questions
which should be asked as the physician conducts the initial “examination” of a
group practice.
HOW IS THE GROUP LEGALLY ORGANIZED?
TRUST THE LEADERS
8
Usually, a medical group practice is organized as
a separate legal entity, most typically one which
provides its owners with a limitation of personal
liability (although no form of legal-entity organization
will protect a professional from potential malpractice
liability for activities in which he or she has personally
participated). The most common forms of legal
organization for medical groups are professional
corporations (PCs), limited liability companies (LLCs)
and, in some states, limited liability partnerships
(LLPs). As a practical matter, the principal operational
differences among these entities relate to the availability
of “pass through” income tax treatment (that is, whether
the income is taxed at the entity level, or is taxed only
to the individual owners as if it had been distributed to
them). Historically, in a few states, professionals such
as physicians have been prohibited from organizing
their practices as limited liability entities of any sort,
and in those jurisdictions, group practices have been
organized as general partnerships in which the owners
(partners) have full personal exposure to all liabilities,
of any type, of the group.
For simplicity’s sake, this article will generically use
the term “group” to refer to the medical group practice,
regardless of its form of legal organization, and will
generically refer to the equity owners of a group as
its “members.”
MEDICAL GROUP PRACTICE
IS THE PHYSICIAN JOINING THE GROUP AS A
MEMBER, OR SOLELY AS AN EMPLOYEE?
Medical group practices often include physicians
who are employees of the group, but not equity
owners. It is common for a group to require that a
newly affiliating physician serve for an initial period
as a nonmember employee so as to assess the new
physician’s performance in the context of the group
and its operations. Employee-physicians who are not
members of the group typically are compensated on
the basis of a fixed salary, or only limited participation
in individual productivity, rather than participation in
the profitability of the group as a whole. In addition,
nonmember physicians ordinarily do not have any legal
rights to vote or participate in the governance of the
group. In essence, the rights and duties of a nonmember
employee-physician would be determined solely by
the terms of his or her employment agreement with
the group. As a result, a physician newly affiliating
with a medical group practice as a nonmember is well
advised to obtain a detailed and carefully considered
employment agreement.
WHEN AND UNDER WHAT CIRCUMSTANCES
WILL THE PHYSICIAN BE ELIGIBLE TO BECOME
A MEMBER OF THE GROUP?
The physician’s employment agreement should
explicitly establish whether and when he or she
will be eligible to become a member of the group
and under what criteria that determination will be
made. The decision will ultimately involve subjective
assessments of the physician’s professional competence
and compatibility with the other members of the
group. But the physician should seek a contractual
commitment which makes that decision as objective
as reasonably possible. Ideally, the physician’s
employment agreement would obligate the group to
address this issue after a specified period of employment
has passed (often two to three years, but possibly
a shorter period if the physician has moved to the
group with an already-established practice and patient
base), and would establish objective benchmarks
which the physician must have met to be eligible for
consideration as a group member (for example, among
others, medical staff admission to specified hospitals,
board certification in the group’s medical specialty, or
a consistent level of revenue production equal to that
of the existing members of the group). The inclusion
of significant objective criteria will not eliminate, but
will help to minimize, the physician’s risk of a purely
subjective negative determination on this issue.
WHAT WILL BE THE COST OF BUYING-IN IF THE
PHYSICIAN IS MADE A MEMBER OF THE GROUP?
A physician newly affiliating with a medical
group practice as a nonmember is well
advised to obtain a detailed and carefully
considered employment agreement.
9
MEDICAL GROUP PRACTICE
member buyouts (for example, whether a member
of the group “buys into” and gets “bought out of” the
group’s aggregate receivables upon entry into and exit
from the group). Specification of an agreed valuation
method in the physician’s employment contract can
help avoid a surprise as to the buy-in price at the time
the membership decision is made.
A similar determination also should be made at the
outset as to how the buy-in price is to be paid. In
particular, the physician should determine whether
the group is willing to allow payment in installments
over time or otherwise to internally finance the buyin. If it is not, the newly admitted member will be
required to obtain the necessary funding personally
through bank loans or similar sources. A physician
should seek the counsel of his or her tax adviser in
connection with considering any type of membership
“buy-in” structure.
TRUST THE LEADERS
A newly admitted member is nearly always required
to buy his or her equity ownership interest in the group
(whether that is in the form of stock, a partnership
interest or other form of membership interest). That
interest could be purchased directly from the group
itself, or might be purchased pro rata from among
the already outstanding equity interests held by the
existing members of the group. In either case, the
crucial issues for the newly admitted member are the
percentage of the total outstanding equity which he or
she will own following such purchase, and, of course,
how the equity interests are valued. The former issue
is important to the new member’s voting rights in the
organization, and potentially important to his or her
percentage share in the profits of the group (depending
on the group’s revenue-sharing arrangements). The
latter issue affects how much the new member must
pay to be admitted to the group in the first place.
The purchase price will ordinarily be a function of
the valuation of the total equity of the group and the
percentage of that total equity which is represented by
the interests to be purchased by the new member.
There are a myriad of potential methods for valuing
the equity of a medical group practice. Among the
more common formulations are: book value of tangible
assets of the group (net of balance sheet liabilities);
current fair market value of all assets of the group
(net of all liabilities), including accounts receivable;
and discounted present value of the group’s net
revenue stream. The appropriate valuation method
will depend on several factors, including the group’s
method of revenue-sharing, the composition of its
assets, its particular combination of revenue sources,
its historical valuation practices for purposes of
member buy-ins, and its practices with respect to
WHAT IS THE REVENUESHARING ARRANGEMENT
AMONG MEMBERS OF
THE GROUP?
There are a variety of possible
approaches to revenue-sharing
within a medical group practice.
The method chosen may be the
most important factor in the overall financial impact
on a given physician of joining the group. It may also
be, on a psychological level, the factor that best reveals
the personality of the group. Some common revenuesharing arrangements are:
Equal sharing of all the net revenues of the
group on a per capita basis (or, alternatively,
according to percentage of equity owned)
among all members of the group, regardless of
individual productivity;
TRUST THE LEADERS
10
Net revenues (after deduction of all expenses)
shared pro rata among the members based
on each member’s percentage contribution
to productivity (with productivity usually
measured in terms of actual collections for
physician services billed by each physician);
MEDICAL GROUP PRACTICE
Net revenues shared among the members
according to productivity, but with expenses
attributable to the particular practice of
a given member charged directly to such
physician (for example, the compensation cost
of such physician’s individual nurse or physician
assistant, the cost of equipment and supplies
specifically used for such physician’s patients,
or the cost of rent and utilities attributable to
such physician’s individual office and examining
rooms), rather than included in the calculation
of net revenues; and
Allocation to each physician-member of
collections attributable to services specifically
rendered by him or her, as well as the expenses
of that member’s individual practice, plus an
allocable share (often determined on a per capita
basis as among all group members)
of the group’s general overhead
expenses (such as the cost of
general administrative personnel,
and billings and collections
operations).
The group’s approach to revenue
sharing can impact not only the
amount of compensation which a
physician can expect from his or her ongoing work
in the group, but also the determination of his or
her buy-in price as a member of the group. Most
particularly, it can impact whether the newly admitted
member is “buying into” the group’s existing portfolio
of accounts receivable as of the buy-in date. It is more
likely, for example, that a group sharing revenues as a
“common pot” will require a new member to buy into
a pro rata share of the group’s existing receivables,
whereas a group that compensates its members on a
“pure individual productivity” basis might view the
receivables as “belonging” to the individual physician
whose services generated them. Under the latter
type of revenue-sharing structure, it is common for
the existing receivables to be distributed out to the
existing members, in some fashion, prior to admission
of a new member, so that he or she does not share in
collections from those receivables. Conversely, in the
same type of revenue-sharing structure, it is common
for a departing member to receive a distribution of the
net collections on “his” or “her” receivables following
departure from the group.
In addition to patient service receivables, group
practices (especially those in certain medical
subspecialties) frequently have significant revenues
from other sources and separate sharing arrangements
with respect to such other revenues. Many privatepractice medical specialists now perform a variety
of office-based procedures which entail the use of
sophisticated diagnostic or therapeutic equipment, or
carry out clinical lab tests on an in-house basis. The
charges for such procedures usually entail not only
physician-service fees, but also a so-called “technical
component” as a cost-recovery for equipment and
Typically, the answer to this question is “yes,” but the
question is not as straightforward as it initially seems. In
addition to the general issue of allocating the premium
cost of the group’s malpractice coverage among the
11
MEDICAL GROUP PRACTICE
inquire about the existence of any such ancillary
entities and about his or her eligibility to become an
owner therein, as well as valuation, timing and terms
of any such buy-in.
TRUST THE LEADERS
facilities. It is common for
WHAT ARE THE GROUP'S
“technical component” revenues
ARRANGEMENTS
to be viewed as related to capital
CONCERNING ON-CALL
COVERAGE?
investment, and therefore shared
What happens if a medical
only among the group’s members,
group is unable to obtain
often according to ownership
One great advantage of a group
malpractice
insurance
for
a
percentage (even in groups that
medical practice is the group
particular physician?
generally share revenues on a
members’ ability to share the
productivity model). It should
burden of being “on call” to cover
patients during nonbusiness hours, such as nights,
be noted that as to “technical component” revenues
weekends and major holidays. Careful inquiry should
produced from certain types of procedures covered
be made at the outset of a physician’s affiliation with
by Medicare or similar federal reimbursement
a group, however, to determine the group’s particular
programs, revenue-sharing according to productivity
call-coverage practices, and the extent to which callis inadvisable because it may be interpreted as payment
coverage responsibility will fall on the particular
solely for ordering the procedures, a violation of the
physician. Areas of concern might be: (i) whether
federal “Stark” and “anti-kickback” laws. A physician
on-call coverage is shared equally by all physicians
newly joining a group should inquire carefully as to
in the group, or is allocated so that senior physicians
how “technical” fees and similar revenues are shared
have proportionately less on-call duty than more junior
within the group.
members and physician-employees; (ii) whether the
group has more than one on-call rotation among its
DOES THE GROUP HAVE ANY ANCILLARY
OPERATIONS TO WHICH THE PHYSICIAN
physicians (for example, a separate rotation for each
WOULD ALSO WANT TO BE ADMITTED?
hospital covered by the group’s practice); (iii) whether
the on-call group maintains separate schedules for
Some medical specialty practices also utilize “captive”
weeknight, weekend and major holiday call rotations;
ancillary operations, organized as separate legal entities,
and (iv) in a multispecialty group, whether the physician
either for financial or regulatory-compliance reasons.
only covers call for patients of his or her particular
For example, the members of a plastic surgery group
specialty, and if not, what backup arrangements are
may conduct their outpatient procedures in an
in place for serious emergencies of patients of the
ambulatory surgery center organized as a limited
other specialties. It should be determined whether
partnership or LLC, separate from the surgery group
the group’s on-call practices are set out objectively in
although having the same equity owners. The revenues
organizational documents of the group, and whether
of such a separate entity would consist of the “technical
those practices are subject to material change in ways
component” or “facility fee” charges for the particular
beyond the control of the average group member or
procedures conducted using the surgery center’s
employee-physician.
facilities. The relative percentages of ownership in
such an ancillary entity may not necessarily be the
DOES THE GROUP PROVIDE MEDICAL
MALPRACTICE LIABILITY INSURANCE
same as those within the sponsoring medical group.
COVERAGE
FOR ALL ITS PHYSICIANS?
A physician newly affiliating with a group should
A newly affiliating physician should assess the scope of any noncompetition agreement and
consider the risk of being excluded from his or her established practice for a substantial
period of time in the event his or her affiliation with the group goes sour.
TRUST THE LEADERS
12
MEDICAL GROUP PRACTICE
group’s physicians, at least two other ancillary issues
should be explored. First, particularly in view of the
growing crisis in malpractice insurance availability
in certain specialties (obstetrics, for example) and
in certain states (Georgia being one), there is the
question of what happens if the group is unable to
obtain coverage for a particular physician (as a result
of his or her personal prior claims experience, or the
general risk level of his or her subspecialty). Can the
group expel that physician, or is it obligated to expend
extraordinary effort and cost to find malpractice
coverage for the physician? In the latter case, who
pays the premium costs?
Also, there is the issue of so-called “tail” or “prior acts”
coverage. This issue arises in two contexts. First, the
group will likely insist, as a condition of employment,
that there be “tail coverage” in place as to any medical
practice activity in which the physician engaged prior
to affiliating with the group. Who pays the cost of
such coverage can be a subject of negotiation. Second,
the group may also require contractual commitments
designed to ensure that “tail coverage” for the physician’s
activities while with the group will be in place upon the
physician’s retirement or other departure. The group
may reserve to itself the right to obtain such coverage
on behalf of, and at the expense of, the physician.
The physician may wish to consider whether the
amount and premium cost of such required coverage
are appropriate, as well as whether it is appropriate in
all circumstances to charge that cost to the physician
(what if, for example, the physician is expelled from
the group without cause?).
DOES THE GROUP REQUIRE NONCOMPETITION
AGREEMENTS FROM ITS PHYSICIANS?
Noncompetition agreements typically prohibit a
physician from practicing his or her medical specialty
in the area served by the group’s offices for a specified
time (often, one or two years) following the physician’s
departure from the group. Although difficult to
enforce in some states, such agreements are commonly
required to protect the group against the risk of having
nurtured its own competitor. A newly affiliating
physician should assess the scope of any proposed
noncompetition agreement (both as to the time period
and the geographic territory covered), and consider
the risk of being excluded from his or her established
practice for a substantial period of time in the event
his or her affiliation with the group goes sour. This
could especially be a concern where the physician’s
subspecialty is one that requires proximity and access
to a specific hospital or a specific group of referring
physicians (for example, if the physician practices in
a narrow pediatric subspecialty, and the noncompete
territory includes the area’s only children’s hospital).
ARE SPECIAL PRIVILEGES ACCORDED TO
PARTICULAR "SENIOR" OR "FOUNDING"
MEMBERS OF THE GROUP?
Special provisions in a group’s organizational
documents may guarantee decision-making control
to the group’s “founders” or its most senior members.
In some cases, that control entails veto power with
respect to operational decisions, and occasionally, a
right to force a dissolution of the group in the event
of protracted disagreement as to such matters. A
group’s governing documents may also provide that
in the event of his or her departure from the group
for reasons other than retirement, the “founder” is
granted individual ownership as to the group’s name,
its principal telephone numbers and its principal office
lease, thus giving him or her effective rights to the
business continuity of the group’s practice. A newly
affiliating physician will also want to inquire as to the
existence of any extraordinary payment arrangements
for any senior members, such as ongoing management
fees or extraordinary retirement benefits (for example,
a long-term retirement stipend in addition to the usual
member buyout rights).
WHAT IS THE GROUP'S POLICY WITH
RESPECT TO DISABILITY?
This is in many ways the other side of the discussion of
“buy-in” structure and valuation. Typically, a physician
departing from a group practice, whether as a result
of voluntary retirement, other voluntary withdrawal,
disability, or even expulsion, is treated as entitled to
have his equity interest redeemed by the group, often at
a valuation determined by the same formula as would
be used to determine the price for a contemporaneous
“buy-in” purchase of the same equity interest. In
WHAT ELSE SHOULD BE CONSIDERED?
These questions are not an exhaustive compilation.
Every medical group, like every medical patient,
is unique, with its own personality, its own quirks,
its own healthy habits and its own aches and pains.
Like any skilled diagnostician, the physician “taking
the history” of his or her prospective medical group
will want to watch and listen closely for the subtle
symptom indicating trouble beneath the surface, or
the anomaly warranting further exploration. But
the questions listed in this article should form a
good basis for gathering the information needed to
reveal the symptoms, good and bad, of the group’s
organizational and operational health. And for the
physician contemplating private practice, this is likely
to be one necessary diagnostic checklist that won’t be
found among the old medical school notes.◆
Bruce Crabtree is a Partner in the Corporate
Practice of Smith, Gambrell & Russell, LLP.
bcrabtree@sgrlaw.com
13
MEDICAL GROUP PRACTICE
WHAT IS THE PHYSICIAN ENTITLED TO RECEIVE
UPON WITHDRAWAL FROM THE GROUP?
addition, in many instances the group’s organizational
documents entitle a withdrawing physician to receive
post-withdrawal payments representing collections of
accounts receivable attributable to his or her patients.
The right to receive either of such types of payments
may depend on the circumstances of the physician’s
withdrawal (for example, whether he or she is retiring,
withdrawing to join another practice, or being expelled
for cause), as well as his or her post-withdrawal
conduct (for example, violation of a noncompetition
agreement may terminate the physician’s right to
receive such payments). The existence and terms of
such entitlements should be confirmed by a physician
at the time of initial affiliation with the group.
TRUST THE LEADERS
It can be in the mutual best interest of the group
and the physician to agree that the physician’s longterm disability causes termination of his or her
employment with, and membership in, the group. But
this is in the physician’s interest only if the physician is
covered by a sufficient amount of long-term disability
insurance to provide adequate replacement income.
The physician should determine whether the group
maintains an adequate amount of disability insurance
covering its physicians (although, both for income
tax and portability reasons, this coverage would
optimally be structured such that the insurance
policies would be individually owned by the covered
physicians). The period of inability to work that
determines a physician’s “disability” under the group’s
organizational documents should be coextensive with
the “elimination period” under the applicable disability
insurance so that the physician’s right to receive
compensation from the group does not terminate
prior to the commencement of payments under the
disability coverage. Furthermore, the definition of
what constitutes disability for purposes of the group’s
termination decision should not be materially different
from (or at least, not materially broader than) that
contained in the applicable disability policy.
14
HIPAA. That term is on the lips of virtually every healthcare provider and
has been a constant area of concern over the last few years. Reviled by many
providers and unknown to most individuals, HIPAA is poised to change the way
the healthcare industry does business. HIPAA establishes, among other things,
the first national standard for the protection of personal health information.
While many providers have been protecting personal health information as a
routine part of business, HIPAA is endeavoring to make the protections more
noticeable to patients and more consistent nationally.
THE HIPAA PRIVACY RULE
TRUST THE LEADERS
by Timothy McDowell & Mark McDermott
But while most providers know about HIPAA, the general public has taken
very little notice. The first time many individuals will encounter HIPAA is when
their physician hands them a multi-page notice of the uses of, and protections
that will be offered to, their personal information. But HIPAA affects a great
number of people other than healthcare providers. Employers that offer group
health plans and any business or individual that provides services to physicians,
healthcare providers, hospitals and insurance companies may also be affected by
HIPAA. Companies and individuals that offer services to healthcare providers
will also find that their business practices will be greatly affected by HIPAA.
The Health Insurance Portability and Accountability
Act of 1996, commonly referred to as HIPAA, was
enacted by Congress to improve access to health
insurance, to promote standardization and efficiency
in the healthcare industry, and to offer nationally
standardized protections for individual health
information. While each issue is important to various
healthcare industry groups, this article will focus on
the single issue of HIPAA that affects everyone – the
Privacy Rule.
The Department of Health and Human Services can
only enforce HIPAA-related penalties against “covered
entities” as they are defined by the regulations. The
regulations define covered entities as healthcare
providers, health plans and healthcare clearinghouses
who engage in any number of electronic transactions.
A healthcare provider under HIPAA is a person or
company that furnishes, bills or is paid for health
care. This definition is fairly broad and encompasses
not only hospitals and physicians, but also includes
chiropractors, dentists, optometrists, hospitals, schools,
nonprofit organizations that provide some healthcare
services, and even government agencies. However, the
true scope of parties that are affected by HIPAA does
not end there.
A number of employers have also found that
they are covered entities under HIPAA because of
their activities running a group health plan for their
employees. Typically, these employers are electing to
be treated as “hybrid entities” to limit the effect of
HIPAA’s restrictions to the specific section of their
organization that runs the health plan. However, even
as a hybrid entity, these employers must undergo all of
the typical HIPAA preparation activities, and this can
be an expensive proposition.
Finally, there are many companies or individuals that
provide services to covered entities that require the use
of protected health information. These companies or
individuals are called business associates. While they
are not liable for penalties under HIPAA, they will
find that many business contracts will have to be
renegotiated and business practices changed to reflect
the privacy requirements.
The HIPAA Privacy Rule
The HIPAA Privacy Rule was created to limit the
release of a patient’s protected health information
without authorization. The privacy rule restricts
any “covered entity” from releasing protected health
information to third parties unless there is a valid
authorization signed by the patient or the release of
information fits within one of the regulatory exceptions.
In general, protected health information is information
that identifies a patient, or can be used to identify a
patient, and relates to (1) a person’s past, present or
future health condition, (2) the provision of healthcare,
or (3) the payment for the provision of healthcare.
Protected information can include such things as names,
addresses, birthdates, Social Security numbers and the
records from a patient’s visit to a provider.
HIPAA requires a physician or health plan to
receive a signed authorization from individuals before
disclosing their information to other parties. However,
the HIPAA Privacy Rule contains exceptions to the
requirement for authorizations in a limited set of
circumstances that either benefit the public good or
where an authorization would hinder the physician
or health plan from offering quality healthcare
services. Some examples of these exceptions include
communications between physicians who are both
treating a patient, disclosures needed by health plans
to resolve billing questions, physician certification and
peer review activities, and other similar situations.
Covered Entities
What Am I Required to Do?
Any covered entity described above should already
have undergone a number of activities to be compliant
with the HIPAA Privacy Rule that went into effect in
April 2003. All covered entities are required to have
drafted a Notice of Privacy Policies to be distributed to
15
THE HIPAA PRIVACY RULE
Who Does HIPAA Affect?
TRUST THE LEADERS
What Is HIPAA?
TRUST THE LEADERS
16
THE HIPAA PRIVACY RULE
individuals describing how their
information will be used and
protected. Next, the covered
entity must create written
office policies for the
protection of information
and train employees.
Finally, authorization
forms and other HIPAArequired documents will
need to be drafted for
patients to sign for any
disclosures not allowed
under the Privacy Rule.
The deadline has already passed for physicians
and other covered entities to be in compliance with
the HIPAA Privacy Rule. However, it is not too late
for physicians or other companies who have not
prepared for HIPAA. The first steps to be taken by
a covered entity trying to become compliant are to
draft the forms to be handed to patients: the Notice
of Privacy Policies and optional Authorization Forms.
As the HIPAA Privacy Rule will be enforced based on
patient complaints only, it is important to provide the
proper forms to the patients. Once those forms are
finished, time can be spent developing policies and
training employees. A good healthcare attorney will
have standard forms and can help any physician or
company get a quick start on HIPAA compliance.
While covered entities may consider themselves
compliant with HIPAA requirements, some subtle
issues often have been overlooked. Most covered
entities are aware that they must distribute Notice of
Privacy Policies to individuals and post the notice on
the wall in their office. However, many covered entities
have not realized that they also must post the entire
notice on any Web site that details the professional
healthcare services offered by the covered entity.
Another subtle issue is the retraining or retesting
of employees to improve HIPAA compliance. While
most covered entities understand that they must train
all employees on the HIPAA Privacy Rule, many
covered entities have nothing in place to ensure that the
employees retain the training. Retraining and retesting
are not explicitly required by the HIPAA Privacy Rule;
however, we consider it to be important to provide
proof of continued compliance. We recommend an
annual or biannual retraining exercise for all employees.
This can be either a brief presentation reminding
all employees of crucial HIPAA requirements or a
multiple-choice questionnaire that identifies employees
who need retraining.
Business Associates
Am I a Business Associate?
Also affected by HIPAA are “business associates”
of covered entities. A business associate under the
HIPAA Privacy Rule is a person or organization that
uses or creates protected health information on behalf
of a covered entity while performing certain functions
or activities. These activities can include such things
as claims processing, billing activities, legal services,
accounting services, consulting services, administrative
services, and even software or hardware support. Some
companies have incorrectly assumed that just because
they provide services for a covered entity that they are
a business associate, but this is not always the case. The
key fact to examine is whether the presumed business
associate ever handles or gains access to protected
health information. This is very much a case-by-case
determination, and it will be decided on the specific
actions each company takes.
The good news for business associates just becoming
aware of HIPAA is that the deadline for putting into
place a HIPAA business associate agreement has
not passed. While the rest of the HIPAA Privacy
Rule went into effect in April of this year, business
associate agreements have a one-year rolling deadline
that ends on April 14, 2004. Any new contractual
agreements or renewals of existing services contracts
between a covered entity and a business associate that
are negotiated after April 14, 2003, must include the
HIPAA-required business associate language. By no
later than April 14, 2004, all contracts between covered
entities and business associates must have the required
business associate provisions.
[
]
While the rest of the HIPAA
Privacy Rule went into effect
in April of this year, business
Business Associates
What Am I Required to Do?
one-year rolling deadline that
ends on April 14, 2004.
large companies, both as business associates and
covered entities, may negotiate hundreds or even
thousands of these agreements, these large companies
are typically taking the initiative to draft their own
forms. This allows a company with a significant number
of agreements to put the agreements in place more
efficiently. Depending on its size and relative power,
the business associate or covered entity may state that
the agreement form is nonnegotiable. The duty to
ensure that an agreement is in place, however, lies with
the covered entities. Thus, every covered entity must
evaluate all services contracts and ensure that there is
a business associate agreement where required.
Business Associate Agreements
Required Elements
The HIPAA Privacy Rule contains a number of
provisions that are required to be included in every
business associate agreement. The absence of any
required provisions will cause the government to deem
the contract invalid, and it will leave the covered entity
open to government prosecution for all disclosures made
to the business associate. When drafting or reviewing a
business associate agreement, it is crucial to distinguish
between these required provisions and any additional
nonrequired provisions that can be negotiated. The
following items are examples of required provisions
for all business associate agreements:
Descriptions of permitted and required uses of
protected information by the covered entity.
Typically, the contract will allow only those
permitted and required uses set forth in the
underlying services contract.
�
A provision preventing the business associate
from disclosing the protected information other
than as permitted or required by the law or the
agreement.
Business Associate Agreements
Drafting Duties
A common question that business associates ask
is which party should be responsible for taking the
initiative to draft a business associate agreement.
The answer depends on the size and nature of the
business associate and the covered entity. Because
17
THE HIPAA PRIVACY RULE
�
TRUST THE LEADERS
HIPAA only directly regulates covered entities.
However, the regulation does manage to exert great
power over business associates as well. Any disclosure
of protected information made by a covered entity
to a business associate without a business associate
agreement in place violates the HIPAA Privacy Rule.
Through the ability to prosecute covered entities for
disclosures that are not made subject to a business
associate agreement, the HIPAA Privacy Rule exerts
pressure on both parties to enter into a business associate
agreement. Without an agreement in place, the covered
entity cannot make the necessary disclosures that the
business associate requires to provide the contracted
services. The only decision left to the business associate
is to agree to all of the HIPAA-required contractual
provisions or terminate the business relationship. It is
not surprising, given these choices, that most business
associates are choosing to subject themselves to the
HIPAA requirements.
So what are the requirements that HIPAA places
on business associates? Generally, business associates
cannot use protected information except when
necessary to provide the contracted services to the
covered entity. Further, the business associate is
restricted from disclosing any protected information
to third parties in any manner that would be a HIPAA
violation for a covered entity. This means, for example,
that a business associate would not be able to sell
customer lists and addresses unless there has been
an authorization signed for these purposes. These
principles are embodied in the required provisions of
a business associate agreement.
associate agreements have a
[
]
The HIPAA Privacy Rule does
not require, or even discuss,
indemnity clauses or damages
due to disclosures of protected
information.
�
Requirement that the business associate use
“appropriate safeguards” to prevent uses or
disclosures of information not allowed by the
agreement. Although some agreements may
try to clarify the safeguards required through a
written plan submitted by the business associate,
all that is required by HIPAA is that the business
associate promise to implement “appropriate
safeguards.”
TRUST THE LEADERS
�
A provision requiring the business associate
to report to the covered entity any uses or
disclosures of information that violate the
agreement. Many agreements may set a strict
time limit (e.g., seven days) for the business
associate to make this report, but there is no
required time limit.
�
A provision requiring the business associate to
get adequate assurance from any subagents or
subcontractors that they will also protect any
information disclosed.
�
A provision allowing any individual to receive
a copy of all of the individual’s protected
information on file with the business associate
upon request.
�
A provision to make amendments and changes
to protected information when appropriate as
requested by an individual. Often, covered
entities may reserve the right to decide what
amendments are appropriate for the business
associate.
�
A provision allowing the Department of Health
and Human Services full access to all books and
records to determine the validity of any HIPAAbased complaints.
�
A provision requiring the business associate
to return or destroy all protected information
under their control upon the termination of the
business relationship.
18
�
A provision authorizing the immediate
termination of the contract by the covered entity
upon a “material violation” of the agreement by
the business associate. Many business associates
are successfully negotiating a prior notice
requirement and period for mitigation. As the
HIPAA Privacy Rule allows the covered entity to
provide an opportunity to cure and resolve, to the
extent possible, any breaches of the contract, this
does not seem to be an unreasonable addition.
Business Associate Agreements
Negotiating Points
THE HIPAA PRIVACY RULE
One of the biggest issues that has come up in
the drafting of business associate agreements is the
attempt by some companies to use these agreements
to renegotiate the underlying services contracts. Often
the drafting party is including additional provisions not
required under the HIPAA Privacy Rule in an attempt
to grab additional power or rights. When reviewing
business associate agreements, it is important to identify
all nonrequired provisions and evaluate the overall
effect of those provisions.
The most common, and most controversial,
nonrequired provision is an indemnity clause. Many
covered entities are attempting to obtain full indemnity
from damages caused by a business associate’s breach
of the agreement. The HIPAA Privacy Rule does not
require, or even discuss, indemnity clauses or damages
due to disclosures of protected information. The
effect or legal validity of these indemnity clauses is
unclear, as the HIPAA Privacy Rule is still too new to
have spawned civil lawsuits. The evaluation of these
indemnity agreements is no different for a business
associate agreement than for any other business
contract.
Another common provision that is not required
under the HIPAA Privacy Rule is a provision allowing a
covered entity to examine the books and premises of the
business associate for satisfaction that the information
will be protected. There is no requirement for this
type of examination in the HIPAA Privacy Rule, and a
covered entity has no duty to ensure the protection of
HIPAA Enforcement
Penalties for Covered Entities & Business Associates
Timothy McDowell is a Partner in the Corporate
Practice at Smith, Gambrell & Russell, LLP.
tmcdowell@sgrlaw.com
Mark McDermott is an Associate in the Corporate
Practice at Smith, Gambrell & Russell, LLP.
mcmcdermott@sgrlaw.com
19
THE HIPAA PRIVACY RULE
The most common question about HIPAA asked by
both covered entities and business associates is what
are the potential penalties for violations. For a covered
entity, the statute authorizes monetary fines of $1,000
per violation up to an annual maximum of $25,000.
For criminal violations, the fines can be as much as
$250,000 and 10 years in prison. Business associates
cannot be prosecuted under HIPAA; however, the
penalty for a business associate can also be substantial.
For a business associate, a violation of the business
associate agreement can lead to immediate termination
of all contracts. Additionally, it is likely that we will see
civil lawsuits for damages filed by individuals harmed
by unauthorized disclosures of
protected information.
The Department of Health
and Human Services’ Office
of
Civil
Rights has
been given
the authority to enforce
the HIPAA
Privacy Rule.
It has stated
that its first goal
is to encourage compliance with the rule rather
than immediately fining
covered entities. For this
reason, we have encouraged
clients to have written documents showing a timeline for
compliance with the HIPAA
Privacy Rule. By showing a
plan for compliance, it is likely that the covered entity will
be allowed to work with the
Office of Civil Rights towards
compliance on a first offense.
The HIPAA Privacy Rule
has already evolved over the
past few years, and we expect that the requirements
and suggested practices to comply with HIPAA will
continue to evolve in the future based upon the
enforcement activity of the Office of Civil Rights.◆
TRUST THE LEADERS
information by the business associate beyond entering
into a business associate agreement. This provision has
typically been requested by large and powerful covered
entities, and it is unclear at this point whether any of
the covered entities have an intention to undertake a
thorough investigation. We have recommended that
business associates not agree to this type of provision,
but the analysis will depend on how comfortable the
business associate is with allowing a business partner
to examine its books and premises.
Another interesting provision that has been included
in some agreements specifies that the covered entity
retains all property rights to the protected information
disclosed to the business associate. This may be
especially important to groups that have a patient
database that would be desirable to third-party
marketers. Some business associates have maintained
that they have the right to strip the individually
identifiable information from the protected information
and sell the collective “de-identified” data to a third
party. HIPAA does create a process for de-identifying
protected information for unfettered use by a covered
entity, but the regulation is unclear as to whether a
business associate has a similar right. Nonetheless, by
retaining property rights to the protected information,
some covered entities are protecting themselves and
their patients from such uses.
TRUST THE LEADERS
20
ATTORNEY–CLIENT PRIVILEGE
What The
ATTORNEY-CLIENT
PRIVILEGE
Really Means
21
ATTORNEY–CLIENT PRIVILEGE
H
ow can a client feel secure from the potential risk of
having sensitive information fall into the wrong hands? In
an extremely complex and competitive business climate
saturated by consultants, technical advisors and outside experts,
the sophisticated business owner might pause to consider one of
the fundamental advantages of retaining legal counsel. By its very
nature, the attorney-client relationship affords a distinct, invaluable
right to have communications protected from compelled disclosure
to any third party, including business associates and competitors,
government agencies and even criminal justice authorities.
TRUST THE LEADERS
by Stephen Forte, Shannan Freeman
& Tammy Bouchelle
ATTORNEY-CLIENT
PRIVILEGE: DEFINITION
TRUST THE LEADERS
22
ATTORNEY–CLIENT PRIVILEGE
The attorney-client privilege is
the oldest privilege recognized by
Anglo-American jurisprudence. In
fact, the principles of the testimonial
privilege may be traced all the way
back to the Roman Republic, and its
use was firmly established in English
law as early as the reign of Elizabeth
I in the 16th century. Grounded in
the concept of honor, the privilege
worked to bar any testimony by the
attorney against the client.1
As the privilege has evolved,
countless policy justifications have
played a role in its development. At
its most basic, the privilege ensures
“that one who seeks advice or aid
from a lawyer should be completely
free of any fear that his secrets
will be uncovered.” 2 Thus, the
underlying principle of the privilege
is to provide for “sound legal advice
[and] advocacy.”3 With the security
of the privilege, the client may speak
frankly and openly to legal counsel,
disclosing all relevant information to
the attorney and creating a “zone of
privacy.”4 In other words, shielded
by the privilege, the client may be
more willing to communicate to
counsel things that might otherwise
be suppressed. In theory, such
candor and honesty will assist the
attorney in providing more accurate,
well-reasoned professional advice,
and the client can be secure in the
knowledge that his statements to
his lawyer will not be taken as an
adverse admission or used against
his interest.5 Indeed, armed with
full knowledge, counselors at law are
better equipped to “satisfy all of their
professional responsibilities, uphold
their duties of good faith and loyalty
to the client, and [contribute] to the
efficient administration of justice.”6
For all of its policy considerations
is the privilege and when does it
apply?
Although there is no single
authority on the attorney-client
privilege, it has been defined as
follows:
“(1) Where legal advice of
any kind is sought (2) from a
professional legal adviser in his
[or her] capacity as such, (3)
the communications relating
to that purpose, (4) made in
ELEMENTS NECESSARY TO ESTABLISH THE PRIVILEGE
1) A COMMUNICATION;
2) MADE BETWEEN PRIVILEGED PERSONS;
3) IN CONFIDENCE; AND
4) FOR THE PURPOSE OF SEEKING,
OBTAINING OR PROVIDING LEGAL
ASSISTANCE TO THE CLIENT.10
and justifications, the attorney-client privilege has a very real practical consequence: the attorney may
neither be compelled to nor may he
or she voluntarily disclose matters
conveyed in confidence to him or
her by the client for the purpose
of seeking legal counsel. Likewise,
the client may not be compelled to
testify regarding matters communicated to the lawyer for the purpose
of seeking legal counsel.7 So, what
confidence (5) by the client,
(6) are at his [or her] instance
permanently protected (7) from
disclosure by [the client] or by
the legal adviser, (8) except the
protection be waived.”8
One federal judge opined that
“[t]he privilege applies only if
(1) the asserted holder of the
privilege is or sought to become
a client; (2) the person to whom
the communication was made
23
ATTORNEY–CLIENT PRIVILEGE
WHAT CONSTITUTES
AN ATTORNEY-CLIENT
RELATIONSHIP?
TRUST THE LEADERS
(a) is a member of the bar of a
the privilege exists, there must expressly acknowledged reprecourt, or his subordinate and (b)
be an attorney-client relationship. sentation of the client. Such an
in connection with this commuAs elementary as this concept express acknowledgment may be
nication is acting as a lawyer; (3)
seems, many clients assume the demonstrated by an engagement
the communication relates to a
relationship exists and mistakenly letter, a fee contract, or even an oral
fact of which the attorney was
rely upon the protection of the agreement as to the scope of the
informed (a) by his client (b)
privilege, but the privilege does not representation. An attorney-client
without the presence
relationship may also
of strangers (c) for the
be expressly acknowlpurpose of securing
edged by the “appearprimarily either (i) an
ance” of the attorney
opinion on law or (ii)
on behalf of the client,
legal services or (iii)
including filing pleadassistance in some legal
ings in court for the
proceeding, and not (d)
client, drafting docufor the purpose of comments on behalf of the
mitting a crime or tort;
client, or appearing in
and (4) the privilege
court as the represenhas been (a) claimed
tative of a litigant.11
and (b) not waived by
Unfortunately,
it
the client.”9
is not always so clear
No matter how the atwhen an attorney-clitorney-client privilege is
ent relationship exists.
articulated, there are four
Suppose Sally Smith
basic elements necessary
contacted
David
to establish its existence:
The attorney-client privilege creates a protection of
Jones, an attorney, by
(1) a communication; (2) privacy so that clients can candidly inform the attorney
telephone. During the
of all the facts in a confidential setting.
made between privileged
course of the converpersons; (3) in confidence;
exist until the relationship is firmly sation, Smith explained to Jones
(4) for the purpose of seeking, obestablished. Generally speaking, that she is involved in a dispute
taining or providing legal assistance
the attorney-client privilege does with the Internal Revenue Service
to the client.10
not take hold until the parties have concerning a tax savings arrangeagreed on the representation of the ment devised for certain business
client.
objectives. She discloses important
In the majority of cases, the facts and highly sensitive informadetermination that the attorney- tion during the conversation, then
client relationship exists is not a asks Jones for his legal opinion. Is
We begin our analysis of the laborious undertaking, for more the content of this conversation
privilege with the obvious: before often than not, the attorney has privileged? It depends.
TRUST THE LEADERS
24
ATTORNEY–CLIENT PRIVILEGE
An express contract is not nec- proceeded to dispense legal advice, complex than when an individual
essary to form an attorney-client then Smith might have a reasonable is involved, as a corporation is an
relationship; the relationship may belief that the relationship exists. artificial “person” created by law
be implied from the conduct of This reasonable belief would be and is only able to act through a
the parties. However, the relation- strengthened by evidence that representative, including officers,
ship cannot exist unilaterally in Smith and Jones discussed payment, directors and employees.
The courts have faced the dauntthe mind of the potential client potential courses of action, and
ing task of determining
absent a “reasonable
when the attorney-clibelief” that the attorent privilege applies
ney-client relationship
when a corporation is
exists. The implied
the client. For years,
relationship may be
courts employed one
evidenced by several
of two “tests” to make
factors, including, but
this determination:
not limited to, the cirthe subject matter
cumstances of the contest13 and the control
versation, the payment
group test.14 The curof fees to an attorney,
rent trend, however,
the degree of sophistifocuses on whether
cation of the would-be
the matters discussed
client, the request for
are encompassed by
and receipt of legal
the corporate duties
advice, and the history
and responsibilities of
of legal representation
the employee.
between the alleged
While originally developed to protect individuals in their
Take, for example,
client and the practi- relationships with their attorneys, the privilege has, for
many
years,
also
applied
to
corporations.
our
hypothetical from
tioner. While this list
before. Suppose that
of factors is illustrative, none of these factors, standing other details regarding the future Sally Smith called not on her own
behalf, but on behalf of her corporaalone, will affirmatively establish handling of the matter.
The waters become more murky tion, ABC Company (ABC). Smith
the existence of an attorney-client
when the potential client is a is the president or chief financial
relationship.12
In our example above, without business entity. In the corporate officer of ABC, and discusses with
the
attorney-client Jones, the attorney, the tax exposure
more, a confidential relationship context,
likely does not exist unless privilege exists between outside or potential liability of ABC. Bethere is some history of former counsel and the corporation. cause Smith is the president of the
representation. Of course, if the Necessarily, however, the invocation corporation, the privilege clearly
conversation continued, and Jones of this right by a corporation is more extends to these communications.
TRUST THE LEADERS
25
ATTORNEY–CLIENT PRIVILEGE
If, however, the call was made by showing is made, certain informa- corporation and the in-house counJane Edwards, the accounting man- tion might create a conflict of inter- sel, the distinction is less clear. Beager, the answer becomes less clear. est for the corporate attorney. In cause in-house counsel often wears
Based upon the current trend of that case, the corporate attorney several hats, courts have struggled
the courts, Edwards’ conversations must end the conversation and ad- with the application of the priviwith the attorney are privileged so vise the corporate employee to seek lege.17 The privilege would extend
long as the issues she discusses with separate counsel.15
to any legal advice rendered, but it
the attorney are
does not protect
directly related to
communications
ATTORNEY-CLIENT PRIVILEGE…OR NOT?
her responsibilities
that are strictly
within the combusiness-related. 18
A COMMUNICATION RELATING TO
pany.
Problems
arise
CORPORATE LEGAL MATTERS BETWEEN
What is the
when the commuresult,
however,
nication contains
A
CORPORATION'S
IN-HOUSE
COUNSEL
when an employee
both legal and
such as Smith
business advice, and
AND THE CORPORATION'S OUTSIDE
seeks advice in
the courts take difher individual caferent approaches
COUNSEL IS NORMALLY SUBJECT TO
pacity, as opposed
in
determining
to the corporate
THE PRIVILEGE. HOWEVER, WHEN THE
whether or not to
one? The courts
apply the privilege.
COMMUNICATION
IS
BETWEEN
A
will extend the
At the very least,
attorney-client
it appears that
REPRESENTATIVE OF THE CORPORATION
privilege to corpothe court will first
rate officers, even
attempt to deterAND IN-HOUSE COUNSEL, THE
as an individual,
mine what role
as long as there
DISTINCTION IS LESS CLEAR.
in-house counsel
is clear evidence
plays within the
that the corporate
company – that of a
One final consideration arises
officer communicated with counsel in the context of in-house coun- lawyer or that of a corporate execuin the officer’s individual capacity sel. A communication relating to tive. From there, many courts will
concerning personal matters such corporate legal matters between a examine the content of the comas potential individual liability. corporation’s in-house counsel and munication, and this examination
Not surprisingly, the showing re- the corporation’s outside counsel is will yield varying results.19 As such,
quired of the corporate employee normally subject to the privilege.16 the in-house lawyer should be carein this regard is a more stringent However, when the communication ful to separate his legal advice from
one. Moreover, even if the requisite is between a representative of the his business opinions.
CONFIDENTIAL
COMMUNCIATIONS
TRUST THE LEADERS
26
ATTORNEY–CLIENT PRIVILEGE
Assuming that the attorney-client relationship is well-established,
is every communication protected?
That also depends. The basic attorney-client privilege protects client
communications
with the attorney.
It also extends to
responsive communications from the
lawyer to the client.
However, the communication need not
be so overt as an oral
or written action.
On the contrary,
the slightest action
or inaction, such as
an affirmative nod
or complete silence,
may constitute a
communication. 20
For example, suppose that Smith is
speaking with Jones,
her attorney, about
a matter involving a recent sale of
stock that is under investigation by
the SEC. Jones asks Smith whether
she received any confidential, nonpublic information prior to the sale
of her stock, and Smith silently
nods her head in the affirmative. Although no words were exchanged,
this communication between Smith
and her attorney is clearly protected
by the privilege.
Nevertheless, a client cannot
protect certain facts from disclosure
simply by communicating them to
her lawyer. If information may be
gathered from another source besides
the privileged communication, then
the underlying information itself is
not privileged.21 Stated differently,
the attorney-client privilege “protects
communications made to obtain
legal advice; it does not protect
the information communicated.”22
Clients and attorneys alike must
bear this important fact in mind:
merely conveying something to
an attorney will not prevent the
underlying facts from compelled
disclosure, if they can be discovered
from a non-privileged source.23
WHEN THE ATTORNEYCLIENT PRIVILEGE
MAY BE WAIVED
Since the client, and not the attorney, holds the privilege, the client
holds the ultimate
authority to assert it
or waive it.24 When
the client is a corporation, the privilege
is commonly viewed
as a matter of corporate control. In other words, corporate
management or the
“control group,” including the officers
and directors, decide
whether to assert
or waive the privilege.25 If and when
there is a change in
the control of the
corporation, ownership of the privilege
is a spoil that passes
to the successors;
it does not remain with the former
corporate management.26
The issue of waiver arises most
commonly when a communication
is witnessed by a third party or
where the client does not intend the
communication to be confidential.
The mere presence of a third party
will likely prevent the creation of
the attorney-client privilege.
Continuing with our hypothetical
characters, suppose that Smith and
her stockbroker meet with Jones
to discuss the suspect sale of stock.
Jones represents Smith in connection with the sale, but not the stockbroker. During the course of the
meeting, Smith discloses sensitive
information. Under this scenario,
the privilege is likely waived and
less, unintentional or inadvertent
disclosure.27
EXCEPTIONS TO THE
ATTORNEY-CLIENT
PRIVILEGE
There are some public policy
exceptions to the application of the
ATTORNEY-CLIENT PRIVILEGE
EXCEPTIONS
 DEATH OF THE CLIENT
 FIDUCIARY DUTY
 COMMON INTEREST EXCEPTION
attorney-client privilege. Some of
the most common exceptions to the
privilege include:
1. Death of a Client.
The privilege may be breached
upon the death of a testatorclient if litigation ensues
between the decedent’s heirs,
legatees or other parties
claiming under the deceased
client.
3. Crime or Fraud
Exception.
If a client seeks advice from
an attorney to assist with
the furtherance of a crime or
fraud or the post-commission
concealment of the crime or
fraud, then the communication
is not privileged. If, however,
the client has completed a
crime or fraud and then seeks
the advice of legal counsel, such
communications are privileged
unless the client considers
covering up the crime or
fraud.
4. Common
Interest Exception.
27
If two parties are represented
by the same attorney in a single legal matter, neither client
may assert the attorney-client
privilege against the other in
subsequent litigation if the subsequent litigation pertained to
the subject matter of the previous joint representation.
ATTORNEY–CLIENT PRIVILEGE
the information conveyed does not
enjoy protection from disclosure.
What if the communication is
disclosed to a third party after a
privileged exchange between attorney and client? Has the privilege
been waived? Possibly. Unlike a
client’s constitutional rights, which
can only be intentionally and knowingly waived, the attorney-client
privilege may be waived by a care-
A corporation’s right to assert
the attorney-client privilege is
not absolute. An exception to
the privilege has been carved
out when the corporation’s
shareholders wish to pierce
the corporation’s attorneyclient privilege.
TRUST THE LEADERS
 CRIME OR FRAUD EXCEPTION
2. Fiduciary Duty.
Not all components of the attorney-client relationship are
protected by or encompassed within the
attorney-client privilege.
TRUST THE LEADERS
28
ATTORNEY–CLIENT PRIVILEGE
In addition to these more traditional policy exceptions to the
application of the privilege, recent
events remind us that the privilege
is not at all absolute. In the wake of
the events of September 11, 2001,
for example, Congress enacted, in
swift fashion, the USA Patriot Act,
allowing for, among other things,
increased authority to conduct
searches and monitor activity without judicial intervention.28 The USA
Patriot Act led to a number of new
rules and executive orders from the
Bush Administration, including the
widely criticized Bureau of Prisons
Rule.29 This rule “authorizes the Attorney General to order the [Bureau
of Prisons] Director to monitor or
review communications between inmates and lawyers for the purpose of
deterring future acts that could result in death or serious bodily injury
to persons or property.”30 All that is
required before such monitoring
can begin is a “reasonable suspicion
. . . that a particular inmate may use
attorney-client communications to
facilitate acts of terrorism.”31 Although the long-term effects of this
new rule cannot be known, one is
reminded that the privilege itself
is not immune from the political
climate in which we live.
MATTERS NOT PROTECTED
BY THE ATTORNEY-CLIENT
PRIVILEGE
Not all components of the
attorney-client relationship are
protected by or encompassed
within the attorney-client privilege.
For example, the existence of the
attorney-client relationship or the
length of the relationship are not
privileged bits of information.32
In fact, the general nature of the
services performed by the lawyer,
including the terms and conditions
of the retention, are generally
discoverable.
The factual circumstances
surrounding the communications
between an attorney and a
client, such as the date of the
communication and the identity of
persons copied on correspondence,
are likewise not privileged.
Participants in a meeting with an
attorney, the length of a consultation
and the documents evidencing same
(e.g., calendars, appointment books)
are not necessarily protected from
compelled disclosure.33 As for the fee
arrangement between an attorney
and a client, these documents are
typically discoverable, except where
such discovery would produce
confidential communications with
the client.34
THE PRIVILEGE:
CLOSING THOUGHTS
While the attorney-client privilege
is firmly established as a legal
doctrine that protects confidential
communications between lawyers
and their clients, its application is
not absolute. The circumstances of
the communication, its content and
even subsequent actions relating to
the privileged communication must
be carefully considered to preserve
the integrity of the privilege. ◆
Stephen Forte is Managing
Partner and a Partner in the
Litigation Practice at Smith,
Gambrell & Russell, LLP.
sforte@sgrlaw.com
Tammy Bouchelle is an
Associate in the Litigation
Practice of Smith, Gambrell &
Russell, LLP.
tabouchelle@sgrlaw.com
Shannan Freeman is an
Associate in the Litigation
Practice of Smith, Gambrell &
Russell, LLP.
sfreeman@sgrlaw.com
TRUST THE LEADERS
29
ATTORNEY–CLIENT PRIVILEGE
ENDNOTES
1
Edna Selan Epstein, THE ATTORNEY-CLIENT PRIVILEGE AND THE WORK-PRODUCT DOCTRINE 2 (4th ed. 2001).
2
United States v. Grand Jury Investigation, 401 F. Supp. 361, 369 (W.D. Pa. 1975).
3
Upjohn Co. v. United States, 449 U.S. 383, 389 (1981).
4
Cathryn M. Sadler, The Application of the Attorney-Client Privilege to Communications Between Lawyers Within the Same Firm: Evaluating United
States v. Rowe, 30 ARIZ. ST. L. J. 859, 859 (1998).
5
Paul R. Rice, Attorney-Client Privilege: Continuing Confusion About Attorney Communications, Drafts, Pre-Existing Documents, and the Source of the
Facts Communicated, 48 AM. U. L. REV. 967, 969-70 (1999).
6
Bufkin Alyse King, Preserving the Attorney-Client Privilege in the Corporate Environment, 53 ALA. L. REV. 621, 622 (2002) (citing Upjohn, 449 U.S. at 391
(quoting Model Code of Prof’l Responsibility EC 4-1 (1980))).
7
Selan Epstein, supra note 1, at 3.
8
8 JOHN HENRY WIGMORE, EVIDENCE IN TRIALS AT COMMON LAW § 2292, at 554 (McNaughton 1961 & Supp. 1991).
9
United States v. United Shoe Mach. Corp., 89 F. Supp. 357, 358-59 (D. Mass. 1950).
10
RESTATEMENT OF THE LAW GOVERNING LAWYERS § 118 (Tentative Draft No. 1, 1988).
11
For example, the Georgia Code specifically provides that “prima facie, attorneys shall be held authorized to represent properly any case in which they
appear.” O.C.G.A. §15-19-7; see also Newell v. Brown, 187 Ga. App. 9, 369 S.E.2d 499, 501 (1988) (noting in dicta that “if an attorney signs an
acknowledgement of service [on] behalf of an alleged client, the attorney is then estopped to deny his lack of authority to act”).
12
J. Randolph Evans, PRACTICAL GUIDE TO LEGAL MALPRACTICE PREVENTION 45-49 (Institute of Continuing Legal Education in Georgia, 2002).
13
The subject matter of the communication was the primary focus of the “subject matter” test. Under this test, courts had to determine (a) whether the
purpose of the communication at issue involved seeking and rendering legal advice to the corporation, (b) whether the employee’s superior had insisted
that the communication be made by the employee, and (c) whether the subject matter of the communication to the attorney was within the scope of
the duties of the employee in question. Thus, under this test, if the subject matter of the communication to the attorney involved the duties of the
employee to the corporation, the attorney-client privilege would cover said communication, irrespective of the corporate rank of the employee that made
the communication. See Harper & Row Publishers, Inc. v. Decker, 423 F.2d 487 (7th Cir. 1970), aff’d by an equally divided court, 400 U.S. 348 (1971).
14
The “control group” was defined by courts as including those employees who were in a position of control such that they could play a substantial role in
determining what action the corporation would take upon receiving the legal advice. See, e.g., City of Philadelphia v. Westinghouse Elec. Corp., 210 F.
Supp. 483, 485-86 (E.D. Pa. 1962).
15
Selan Epstein, supra note 1, at 110-13.
16
Mary Thompson & Bridget Rienstra, In-House Counsel . . . and the Preservation of Privilege, 35 HOUS. LAW. 21, 22 (1998).
17
See generally Thompson & Rienstra, supra note 16; see also Amber Stevens, An Analysis of the Troubling Issues Surrounding In-House Counsel and
the Attorney-Client Privilege, 23 HAMLINE L. REV. 289 (1999).
18
See generally Stevens, supra note 17, at 303-09.
19
Id.
20
See, e.g., United States v. Andrus, 775 F.2d 825, 852 (7th Cir. 1895) (holding that in a criminal case, silence may constitute an admission of guilt).
21
See Upjohn, 449 U.S. at 395-96 (noting that the attorney-client privilege protects only the disclosure of communications from client to attorney, not the
disclosure of the underlying facts by those persons who communicated with the attorney).
22
Rice, supra note 5, at 979 (citations omitted).
23
Id.
24
Id.
25
See, e.g., Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 349 & n.5 (1985) (stating that “the power to waive the corporate attorneyclient privilege rests with the corporation’s management and is normally exercised by its officers and directors.”)
26
See, e.g., O’Leary v. Purcell Co., Inc., 108 F.R.D. 641, 644 (M.D.N.C. 1985).
27
Id. at 263-65.
28
USA Patriot Act of 2001, Pub. L. No. 107-56, 115 Stat. 272.
29
See generally Avidan Y. Cover, A Rule Unfit for All Seasons: Monitoring Attorney-Client Communications Violates Privilege and the Sixth Amendment, 87
CORNELL L. REV.1233 (July 2002).
30
Id. at 1235.
31
Id.
32
See, e.g., Savoy v. Richard A. Carrier Trucking, Inc., 178 F.R.D. 346, 350 (D. Mass. 1998).
33
Selan Epstein, supra note 1, at 66-67 (citations omitted.)
34
See, e.g., United States v. Keystone Sanitation Co., 885 F. Supp 672, 675 (M.D. Pa. 1994).
:
by Mark de St. Aubin & Dana Grantham
M
TRUST THE LEADERS
30
REBUILDING IRAQ
ilitary acronyms have filled the
airwaves over the past few months
as the United States won the war
in Iraq and committed to rebuild that
country’s deteriorated infrastructure and
industrial complex. Although LSTK EPC
may sound like just more military-speak,
it’s actually a construction acronym for the
standard design-build method for “turnkey”
delivery of large scale construction
projects like power plants and chemical
manufacturing facilities.1 In lump sum
or fixed price engineering, procurement
and construction projects, the contractor
generally provides design, procurement,
construction and plant “start-up” services,
allowing the project owner simply to “turn
the key” and operate the completed facility.2
When successful, this type of construction
contract offers significant rewards. It can
also carry significant risks.
depending on how they structure their contracts and
assess and allocate risk. Any contractor that offers
to perform design-build work for a lump sum price
should be aware, however, that the nature of LSTK
EPC contracting has changed over the last few years
and it may no longer be an attractive delivery model for
significant industry sectors, including power, oil-andgas, chemical, water, wastewater and transportation.5
This article briefly analyzes some of the original
advantages of LSTK EPC contracting, what went
wrong, and a few of the promising alternatives that
leaders in the field are considering in their search for
ways to provide design-build “plus” services with an
acceptable level of risk. Understanding the benefits
EPC was intended to achieve and the reasons it has
fallen out of favor may help firms seeking work in Iraq
to structure acceptable project risk profiles, leading to
more profitable projects.
THE INTENDED BENEFITS OF LSTK EPC:
A SOUND THEORY
EPC became the standard method of project delivery
for the fledgling private power sector in the early
1980s.6 An enhanced form of design-build, EPC was
especially attractive to owners because it provided a
single source for all the services necessary to deliver
a fully operational facility that met the owner’s
performance requirements.7 Advantages for owners
of EPC projects included:
31
REBUILDING IRAQ
The estimates for reconstruction costs are staggering. Independent estimates
predict such costs will approach $20 billion, with some foreign experts
pegging the final total at closer to $100 billion.
TRUST THE LEADERS
In what can only be described as a global feeding
frenzy, companies from around the world are jockeying
for position and the chance to land a contract for a
piece of the reconstruction pie in Iraq. Firms that
participate in the massive reconstruction effort and
the “mega” power, infrastructure and process projects
that will be built would do well to ask the following
question: Does the significant profit potential of this
project justify providing engineering, procurement and
construction (EPC) services on a lump sum turnkey
(LSTK) basis? For an increasing number of contractors,
the answer may be no.
For the short term, work is underway to restore
and stabilize Iraq’s war-torn infrastructure. Two
American firms, Bechtel National and Kellogg Brown
and Root, have received multi-million dollar contracts
to spearhead the effort to get Iraq back on its feet.3
Once the basic infrastructure is restored, longterm
needs will require the construction and rehabilitation
of everything from power plants and electrical grids
to communications systems, water/sewer facilities
and major transportation infrastructure projects.
The estimates for reconstruction costs are staggering.
Independent estimates predict such costs will approach
$20 billion, with some foreign experts pegging the final
total at closer to $100 billion.4
Whatever the final number, all agree that the poststabilization opportunities for profitable work are
enormous. Contractors will make or lose money
Reconstruction begins at the jetty at Umm Qasr, Iraq
(1) the ability to bring large-scale, complex
projects on line on a fast-track basis so the
owner’s investment could begin to generate
revenue earlier;
TRUST THE LEADERS
32
the bulk of the risks inherent in the construction and
operability of the facility.
There were also benefits for the contractor. Liability,
for instance, was typically limited to a percentage of the
overall contract price. Since the work was performed
for a fixed price or lump sum, the contractor could
increase its profit margins through cost-effective
design, streamlined engineering and construction
operations, and on-time schedule performance. Finally,
contractors that beat their completion deadlines and
exceeded performance requirements were often
entitled to substantial bonus payments.10
EPC contracting was successful, but only on certain
types of projects, particularly those that were moderate
in scale. Generally, owners and contractors both fared
well on projects that were:
(2) reduced owner costs in the initial project
development and design phases through
specification of desired performance
criteria;8 and
● well defined from the outset (minimal
owner-sponsored changes);
(3) effective realization of project design
and compressed project duration brought
about by improved communication between
design and construction personnel.9
● of an execution duration greater than or
equal to 30 months.11
REBUILDING IRAQ
The added services that contractors provided in
addition to design-build included plant commissioning,
start-up, performance testing, personnel training for
facility operation, and others. Finally, most early EPC
projects were bid for a “lump sum” price and delivered
on a turnkey basis, effectively shifting to the contractor
● carried out in a predictable environment;
● valued up to $250-$300 million; and
For projects with contract values over $500 million,
the results were dramatically different. According to
an industry study of these large-scale chemical, process
and power projects, both domestic and international,
unless major unexpected political and/or national
labor difficulties resulted in price adjustments for
contractors, “contractors only met or exceeded their
expectations about 20% of the time.”12 Contractor
Over time, owners began to demand an increased role in the design process,
heightened fast-track completion requirements, and enhanced
performance guaranties with no corresponding assumption of risk.
losses and extended completion
delays were attributed to various
causes, including unrealistic goals
set by the owner; inadequate
owner oversight; inadequate risk
assessment by the contractor; lack
of adequate project controls and
change management; and “excessive
exuberant bidding,” among others.13
The post-war Iraq market is prime
for many of these same pitfalls.
WHY EPC DELIVERY FELL OUT
OF FAVOR
33
REBUILDING IRAQ
Not surprisingly, contractors met the increase in risk with higher pricing, thereby
depriving owners of the cost savings EPC projects were intended to provide.
TRUST THE LEADERS
Contractors initially welcomed
the lion’s share of risk on EPC
projects in return for the significant
Workers rebuild part of a wall bombed out of Iraq's central post office
profit potential that could be
derived from having simultaneous
control over design, procurement, and construction and
and EPC contractors were caught in the squeeze. Not
any resulting cost and schedule efficiencies. Over time,
surprisingly, contractors met the increase in risk with
however, owners began to demand an increased role in
higher pricing, thereby depriving owners of the cost
the design process, heightened fast-track completion
savings EPC projects were intended to provide. Even
requirements, and enhanced performance guaranties
worse, the incidence of disputes soared, often followed
with no corresponding assumption of risk. Risks
by protracted and costly litigation.
associated with third-party technology and equipment
By the time the '90s drew to a close, the effectiveness
of the EPC delivery mechanism had clearly diminished,
supplied by owner equipment manufacturers (OEMs)
with escalating project costs and fast-track schedules
were also increasingly shifted to the contractor. 14
inexorably pushing many contractors towards
Contractors bid on EPC projects where they were
insolvency. For those left standing, the EPC contractor’s
unable to adequately utilize value engineering and
15
dilemma – getting cold feet about using a high risk/
innovation to balance the increase in accepted risk.
high return method of project delivery in the face of
Profit margins declined, owner penalties increased,
Construction work in Basra, Iraq
TRUST THE LEADERS
34
growing demand – left many companies scrambling
for modified forms of project delivery for power and
process facilities with a more balanced allocation of
risk.16 As one industry consultant pointedly remarked,
“How can the power sector deliver one new power
plant per week for the next 20 years, when its major
contractors are falling like flies?”17
Except for the occasional project, many now believe
that the risks of LSTK EPC outweigh the rewards.
The evolving situation in Iraq, coupled with the
trend toward owners
combining into large
consortiums, even for
a single project, in order to minimize their
own risk, recently
prompted one of the
top international construction firms to draw
a line in the sand. “In
the offshore market,
we continue to win
some business, but we
announced that we will
no longer pursue EPC
[engineer-procure-construct] on a lump-sum,
turnkey basis,” says Ken
Allen, senior vice president of sales and marketing for Kellogg, Brown & Root
(KBR), a unit of Halliburton Company. As far as
lump sum turnkey construction goes, Allen admits,
“The risk-reward profile on those projects is totally
out of balance. Other companies have taken a similar
position, but have not been so outspoken.” Changing
established commercial practices with customers can
be problematic, however. As KBR’s Allen put it, once
“[owners] have agreed on a contracting approach, it
gets difficult to change.”18
REBUILDING IRAQ
Risk-sharing alliances, engineering-and-contractor
consortiums, owner-contractor cooperation and target pricing have
all been “test-run” with some success.
Nevertheless, even some owners have reluctantly
concluded that the LSTK EPC model is flawed because
it fosters an adversarial “who’s to blame” contracting
culture. In their experience, dealings with contractors
and suppliers have too often resulted in increased
project costs, out-of-control schedules and protracted
litigation to settle claims.19 Simply stated, LSTK EPC
has in large part failed to achieve its primary goals:
owners are not receiving lower cost plants and on-time
completion, and contractors are facing project losses
due to disproportionate risk assumption.
LOOKING FOR NEW ROADS
management, completion risk contingencies and legal
costs. Problems are solved jointly, and innovations are
rewarded.20
However, even a well-intentioned owner seeking to
balance the risk makeup of a project can be seriously
restricted by project financing requirements and
lender and/or underwriter demands for a complete
shifting of risk to the contractor.21 Despite the many
advantages and benefits touted by the alliance method,
many lenders and owners in the power plant market
remain resistant to adopting this collaborative model
chiefly because it involves such a dramatic change in
the traditional project relationship between owner and
EPC contractor.22
EPC contractors are also returning to cost-plus
contracts. Faced with industry-wide losses and even
insolvency, some contractors are forgoing the possibility
of earning a windfall from a fixed price contract and
opting for the potentially lower profit but increased
35
REBUILDING IRAQ
With target pricing, contractors benefit from the more manageable cost risks,
and owners benefit from the lower prices
that flow from reduced risk contingencies and lower insurance costs.
TRUST THE LEADERS
To solve the current problems with EPC, some
contractors and owners are experimenting with more
collaborative delivery models which apportion the risk
more evenly. Risk-sharing alliances, engineering-andcontractor consortiums, owner-contractor cooperation
and target pricing have all been “test-run” with some
success.
Project-alliance contracting, which claims to offer
an integrated management approach, open-book
accounting and financial incentives to share risks,
has been fairly successful in the oil-and-gas, water,
wastewater and transportation sectors. Participants
share risks, define common business goals, and set target
costs and schedules together as a team. Successfully
accomplishing these tasks can reduce oversight
U.S. employees at work in Umm Qasr, Iraq
TRUST THE LEADERS
36
likelihood of obtaining that profit which the cost-plus
model affords. Other contracting firms are encouraging
owners to share risks in return for receiving a steep
discount in project pricing.
“Target pricing” represents yet another stop on the
road to balanced risk. With the target price method,
the contractor and the owner set a target price, and
share the overruns or underruns as defined by the
contract’s terms.23 Contractors benefit from the more
manageable cost risks, and owners benefit from the
lower prices that flow from reduced risk contingencies
and lower insurance costs. Although the target pricing
alternative may not be for every project owner since
it requires a different level of owner involvement
than that required by an LSTK EPC contract, some
who have employed the target pricing method have
found that negotiating cost overruns can promote good
contractual relationships, particularly when viewed as a
“lesser evil” alternative to litigating such problems.24
As a way to spread the risk inherent in the truly
huge projects, large EPC contractors are also joining the
consortium bandwagon. For example, Foster Wheeler
Ltd. recently announced that BSF, a consortium of
Bechtel Petroleum & Chemical of the United States,
Sinopec Engineering, Inc. of China, and Foster Wheeler
Energy Limited of the UK, had been appointed
as the project management contractor by Chinese
oil producer CNOOC and Shell Petrochemicals
Company Ltd. for the implementation phase of a
world-scale, $4.3 billion petrochemicals complex in
China’s Guangdong province.25 The CSPC Nanhai
Petrochemicals Project represents the largest-ever joint
foreign-Chinese investment in China. The plant will
be built on Daya Bay in the Huizhou Municipality of
Guangdong province.
THE CHALLENGE FOR THE FUTURE:
AVOIDING THE EPC TRAP
Post-war Iraq will present plenty of opportunities
for contractors to provide design-build services, but
Iraq’s risk-laden environment also presents tremendous
challenges, including inadequate qualified labor,
security, insurance issues and terrorism, to name
just a few.26 Contractors should seriously consider
whether LSTK EPC delivery would be appropriate
under any circumstances, much less those currently
in Iraq. Of course, careful contract drafting can
help minimize contractor risks, particularly through
inclusion of realistic time and performance guaranties,
force majeure clauses, and limitations on owner control
over scope.
The core design-build components of EPC are
likely to remain. It is equally likely, however, that a
more balanced approach to risk allocation will occur.
Those pursuing large scale construction projects using
alternative delivery methods or modified versions of
EPC should take a close look at the history of EPC
to see what works and what is likely to end up just
another casualty of the rebuilding war.◆
REBUILDING IRAQ
Contractors should seriously consider whether LSTK EPC delivery
would be appropriate under any circumstances,
much less those currently in Iraq.
ENDNOTES
15
This article is adapted from a presentation by Mark
de St. Aubin, EPC Contracting: Can the Lessons of its
Shortcomings Lead to its Successful Application on Future
Power and Process Projects?, in "The Future: Alternative
Contracting Arrangements for EPC Deliveries", The
Contractor’s Construction Superconference, San Francisco,
California, December 12-13, 2002.
16
1
Mark W. Cohen, EPC Delivery Mechanism Fundamentals,
in "The Future: Alternative Contracting Arrangements
for EPC Deliveries," The Contractor’s Construction
Superconference, San Francisco, California, December 1213, 2002.
2
Bechtel National, Inc., headquartered in San Francisco,
USA, was awarded in April 2003 a $680 million “cost
plus fixed fee” prime contract for reconstruction activities
in Iraq by the United States Agency for International
Development. KBR is working pursuant to two contracts.
See www.bechtel.com and www.halliburton.com.
3
Richard Korman, Risk-Sharing Returns to Contracts and
Rearranges Market Priorities, ENGINEERING NEWS-RECORD,
Dec. 3, 2001, at 21.
Grynbaum, supra note 5 (“Consider the recent fates of former,
once-reputable firms such as Stone & Webster, Morrison
Knudsen and Raytheon Engineers & Constructors”).
17
Gary J. Tulacz & Mary B. Powers, Global Political and
Business Turmoil Takes a Toll on International Revenue,
ENGINEERING NEWS-RECORD, May 19, 2003, at 79.
18
19
Grynbaum, supra note 5.
20
Id.
21
Korman, supra note 16.
22
Grynbaum, supra note 5.
23
Korman, supra note 16.
24
Id.
Press Release, Bechtel/Sinopec Engineering/
Foster Wheeler Consortium Implements $4.3 Billion
Petrochemicals Project in Southern China, Business Wire,
May 28, 2003 <http://biz.yahoo.com/bw/030528/285378_
1.html>.
Elizabeth Becker, Aftereffects: The Contractors; Feeding
Frenzy Under Way, as Companies From All Over Seek a
Piece of the Action, N.Y. TIMES, May 21, 2003, at 18; Dalal
Saoud, Experts Discuss Iraq Reconstruction, ENGINEERING
NEWS-RECORD, May 23, 2003.
25
Joseph Grynbaum, Risk-shifting Contracts Hurt,
ENGINEERING NEWS-RECORD, Sept. 17, 2001, at 63.
26
6
Id.
Peter F. Fitzgerald, Chadbourne & Parke LLP: Project
Financing Technique, in PROJECT FINANCING 2000 BUILDING
INFRASTRUCTURE PROJECTS IN DEVELOPING MARKETS 69 (PLI
Corporate Practice Course, Handbook Series No. B0-0000,
2000).
7
Charles P. Woodward & Kartar Singh, Managing Risk
on Global Projects, in 1996 TRANSACTIONS OF AACE
INTERNATIONAL (1996).
8
37
9
Richard W. Pearse, Uncovering Hidden Costs,
INDEPENDENT ENERGY, June 1997.
10
Louis J. Cabano, Lump Sum Contracting: Too Hot to
Handle? (last visited June 2002) <www.pathfinderinc.com>.
11
12
Id.
13
Id.
14
Cohen, supra note 2.
Mark de St. Aubin is a Partner in the Construction Practice
at Smith, Gambrell & Russell, LLP.
mdestaubin@sgrlaw.com
Dana Grantham is an Associate in the Construction
Practice at Smith, Gambrell & Russell, LLP.
drgrantham@sgrlaw.com
REBUILDING IRAQ
Mark C. Friedlander, A Primer on Industrial Design/
Build Construction Contracts (last visited June 28,
2002) <www.schiffhardin.com/practice/p_construction_
article12.html>.
Potential bidders have been told they must arrange for and
supply their own security and telecommunications, as well
as provide living accommodations and food for their crews.
Employees will be required to wear Kevlar helmets and flak
jackets for personal safety reasons. Workers already there
often need military escorts to protect them, which can take
several days to arrange and are often subject to last-minute
cancellation. Not to mention snipers, unexploded ordnance,
mines, looters and other assorted obstacles. Sherie Winston
& Peter Reina, Thousands Jockey to Rebuild Iraq, ENGINEERING
NEWS-RECORD, June 2, 2003, at 14.
TRUST THE LEADERS
4
5
Id.
Blue Bird Corporation:
Transportation with Cherished Traditions
TRUST THE LEADERS
38
The year 2003 marks Blue Bird’s 76th anniversary.
Founded in 1927, Albert Luce pioneered the first
school bus – Blue Bird No. 1. His vision guided Blue
Bird through the Great Depression, tragic wars and a
fire that destroyed his plant in Fort Valley, Georgia.
His vision, leadership and determination became the
foundation of Blue Bird.
A valued Smith, Gambrell & Russell client for more
than 30 years, Blue Bird is the only bus manufacturer
that produces school buses, commercial buses and
recreational vehicles from start to finish. The Luce
family began Blue Bird because they saw a critical
need for safe, economical school bus transportation.
School buses carried precious cargo, and the Luce
family wanted to ensure that children arrived at school
safely. The company successfully communicated
the need for safe school transportation, and
business boomed.
While Blue Bird was deep in the school
bus manufacturing process, World War II
erupted and school bus production ceased.
For the most part, the only buses produced
were for the transport of war workers and
soldiers to and from military bases. But what
could have taken Blue Bird out of operation instead
became Blue Bird’s means of contributing to the war
effort. Blue Bird answered its country’s call by quickly
constructing ambulances and supplying buses to the
government for the war effort.
Blue Bird continued to prosper over the coming years
and, following the war, developed new, innovative school
buses and increased efforts in the export market. To
meet increased demand, Blue Bird built additional facilities throughout North America.
In the late 1950s, Blue Bird made another strategic
growth decision to expand its market and begin
manufacturing other modes of transportation. With
this expansion came the birth of the first Wanderlodge,
Blue Bird’s luxurious motor coach, which rolled off the
assembly line in 1963. Today, motor-home aficionados
all over the world view the Wanderlodge as the “top of
the line.”
The company’s success in the school bus and motor
coach markets provided Blue Bird the opportunity to
once again venture into other transportation segments.
In the early 1990s, Blue Bird began manufacturing
commercial buses.
Thanks to its past successes, experiences and strategic
vision for the future, Blue Bird has announced new
products in each segment of the market it serves:
school bus, public transportation and motor homes.
“Today, Blue Bird embarks on an aggressive
growth strategy,” said Richard Maddox, Vice
President and General Manager, School Bus
Business Unit of Blue Bird. “We are securing
our future by broadening our business base.”
The future holds much promise for Blue
Bird. With more innovative products in the
works, there is no doubt Blue Bird’s next major
milestone – the century mark – will be cause
for even greater celebration. “Our current – and growing
– product offerings are a direct result of 76 years of
experience,” Maddox said. “Blue Bird’s rich history has
afforded us many opportunities, but more importantly,
our vision is towards the future.”
Blue Bird has nearly 3,0 0 0 employees, four
manufacturing facilities in three countries and an
extensive network of dealers and service-parts facilities
across North America. For more information, visit
www.blue-bird.com. ◆
CLIENT PROFILE: BLUE BIRD
Smith, Gambrell & Russell’s Israeli Initiative by Jonathan Minnen
Jonathan Minnen is a Partner in the Corporate Practice at
Smith, Gambrell & Russell, LLP.
jminnen@sgrlaw.com
39
35
THE FINISH LINE
work for Israeli clients involves many of the Firm’s
practice areas, including M&A, venture capital, general
transactional work, litigation, intellectual property,
immigration and labor and employment law. Both
Israeli companies and their law firms have capitalized
on our Firm’s size and breadth of practice, our ability
to handle their legal needs throughout the U.S., and the
economic efficiency of working with our Firm, which
has the dual advantages of having multiple offices and
an Atlanta-based cost structure. Our availability to
engage in conference calls and work on urgent projects
on Sunday, the first day of the work week in Israel,
has been well received, as has our willingness to craft
solutions to the variations in approaches to business and
legal matters.
We believe that being of assistance also requires
sincerity of purpose, which we demonstrate by making
periodic visits to Israel to call upon clients and friends
of the Firm, regardless of the political climate. I feel
privileged to spearhead the Israeli Initiative for SGR, as
I get to be the partner who leads these trips. I returned
from my most recent trip last May, where I conducted
almost 40 meetings in Tel Aviv, Herzliya, Netanya,
Haifa, Rosh Ha’ayin, Jerusalem and Ashkelon. The
pace is hectic, but meeting with clients and friends
of the Firm in Israel is an investment which we feel is
important and which I personally find very satisfying.
The Firm’s commitment also extends to our being
active with both our time and financial support of the
American-Israel Chamber of Commerce, Southeast
Region. This organization covers six southeastern
states and is often viewed by other binational chambers
of commerce as the model to emulate for success. I
am delighted to serve on the Board of Directors
and the Executive Committee of this very effective
organization.
Israel will continue to be an important part of the
world community. Yet Israelis know that due to the
size of the country and the limited market potential
in adjacent countries, the U.S. is a prime strategic
marketplace for their technology, goods and services.
We look forward to our continued involvement and
assistance. ◆
TRUST THE LEADERS
Smith, Gambrell & Russell, LLP has had a robust
international practice for many years, assisting off-shore
companies and law firms from continental Europe,
South America, Great Britain and the Far East with
their U.S. legal needs. In the summer of 2000, we
decided that the State of Israel was a logical extension
of our international activities.
But why Israel? The technology bubble was already
rapidly deflating, impacting both the U.S. and the Israeli
marketplace, and a period of horrific violence was soon
to cast a dark shadow over the small country which is
only approximately the size of Delaware in land area.
The level of interest in Israel by some companies and
organizations waned as the international recession
deepened and terrorist attacks increased.
We were convinced, however, of the continued
opportunities in Israel. We knew that Israel had become
a technological powerhouse in the world, and that the
intrinsic resiliency and tenacity of Israel would persevere.
The statistics have validated our belief. In proportion to
its population, Israel has the highest number of start-up
companies in the world, and even in absolute terms is
second only to the U.S. Israel is ranked second in the
world for venture capital funds, right behind the U.S.,
and is ranked third in NASDAQ listed companies,
following only the U.S. and Canada. Twenty-four
percent of Israel’s workforce holds university degrees,
ranking third in the industrialized world, after the U.S.
and Holland. Many U.S. companies have historically
turned to Israel to develop new technologies and to
enhance product offerings. U.S. companies with a
major presence in Israel include Microsoft, Intel and
Motorola. Of the products and technologies we use
every day, such as computers, mobile phones, instant
messaging, and other electronic and medical devices,
quite a number of them have a strong Israeli connection
in terms of their development and refinement. And,
not surprisingly, much of the world’s technology for
crop irrigation in extremely arid environments was
developed in Israel.
The strategic focus of SGR's Israeli Initiative is to
serve the U.S. legal needs of Israeli companies and their
law firms. Launched in the late summer of 2000, we
have seen dynamic growth in our Israeli Initiative and
currently represent companies well-known in Israel,
that have international operations, including Jacada,
Scitex Vision America, TesCom, the Israeli venture
capital firm Veritas Venture Partners, and a wide
variety of other Israeli companies of various sizes. Our
In OUR next issue
Smith, Gambrell & Russell, LLP
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TRUST THE LEADERS
From the day Smith, Gambrell & Russell, LLP opened its doors in 1893, the
firm has pursued a vision of building one of the country’s premier fullservice firms. Today, we serve clients around the globe from our offices in
Atlanta, Jacksonville and Washington, D.C.
This historic anniversary offers us an opportunity to reflect on our history
and, more importantly, to acknowledge and show appreciation for the
relationships that have made us what we are today.
110 years of service to our clients. 110 years of service to our communities.
110 years of leadership in the legal profession.
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