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LITIGATION READINESS

What is “Litigation Readiness”?

 

A strong compliance function is a fundamental requirement for any business.  But the compliance function is only the first step in being able to defend against investigations and litigation related to business operations, especially as such operations impact communications and interactions with consumers.  Knowing the law and following the law are meaningless unless you can prove it.  Being “Litigation Ready” means being able to quickly and efficiently prove that your company’s operations comply with the law.

 

Litigation Readiness is an operational concept that involves structuring a comprehensive compliance program that not only identifies and analyzes the law, but also systematically captures critical information you will need to defend against legal or regulatory challenges.

 

Litigation Readiness is a detailed and structured “how-to” process for ensuring the proper creation, organization, preservation, analysis and immediate access to critical information and evidence necessary to respond to litigation or regulatory investigations.

 

How does the “Litigation Readiness” system work?

 

The “Litigation Readiness” system consists of a five-part analysis that addresses the following critical questions:

 

1. What laws apply to my business?

2. What policies and procedures must be implemented to ensure that my business complies with those laws?

3. What documentation (i.e., evidence) should be created and maintained to prove that my business complies with the law?

4. How does my business train and track employees to make sure they comply with the relevant laws, as well as company policies and procedures?

5. How do I monitor information available from outside sources about my business’ compliance with relevant laws and company policies and procedures?

Why do I need a “Litigation Readiness” system?

 

The purpose of the system is to define what documents are needed to establish the business’ compliance with the applicable laws and to maintain those critical documents in a form that can easily be delivered to legal counsel in hours or days, rather than weeks or months, in the event of a regulatory inquiry or litigation. This ability to quickly produce key information demonstrating and supporting the company’s compliance enhances the company’s ability to defend itself, especially in the context of a regulatory investigation.

 

The Litigation Readiness System

 

1. The Law

 

Working with compliance counsel, the first step in the review process focuses on identifying business-specific laws, rules and regulations that apply to, and govern the business. Good compliance analysis begins by understanding what a company does, how it does it, how it markets its products and services, to whom it markets, and where it markets. All of these factors will implicate laws that govern a company’s operations.Sources of “law” that govern marketing and sale of products or services include:

 

  • Federal and State statutes and case decisions

  • Regulations, like the FTC or other agencies that promulgate regulations, rules and guidance publications

  • Industry self-regulatory rules

  • Relevant Attorney General enforcement activity

  • Consent Orders and Agreements of Voluntary Compliance (AVCs)

 

Laws that govern business operations can focus on the nature of the products or services sold, the manner in which they are delivered to consumers, what is represented by the products and services, how they are marketed, where they are marketed or to whom they are marketed. Companies often have a fundamental understanding of the laws that govern the nature of the products and services that are sold, but often these same companies miss the other laws that focus on the “how,” “to whom,” and “where” those products and services are marketed and sold.

 

For example:

 

- Specific laws apply based on where products and services are marketed:

 

  • Traditional Retail

  • Email and Internet

  • Television

  • Direct Mail

  • Telemarketing/Mobile

  • Home-Based Solicitations

 

- Specific laws apply based on how your Company markets its products or services:

 

  • Testimonials/Endorsements

  • Free samples or free trials

  • Collection of consumer data

  • Negative options

  • Incentive gift or rebate cards

 

- Specific laws apply based on how products and services are delivered.

 

  • Retail stores

  • Mail delivery

  • Internet (downloaded products, ordered services)

 

- Specific laws apply based on to whom products and services are marketed and sold:

 

  • Financially challenged consumers

  • Seniors

  • Children

  • B2B

  • Direct sales

  • Sales through retailers or affiliates

 

2. Policies and Procedures

 

Developing policies and procedures is the first step in executing a comprehensive compliance program that leads to Litigation Readiness. Policies and Procedures help ensure that the company complies not only with each of the applicable laws identified above but also with written policies and procedures that serve as evidence of corporate intention, motivation and plan of execution.

 

Developing comprehensive policies and procedures requires a thorough evaluation of how the business operates, focusing on the following issues:

 

  • What steps are (or can be) taken to assure that the business complies with the relevant laws?

  • How are (or can) those steps be documented?

  • Where is that documentation maintained?

  • Is that documentation easily accessible in the event of a lawsuit or regulatory investigation or enforcement action?

  • How long would it take to assemble the documentation in its present state?

  • Can that access be improved/expedited?

 

Like the laws that govern a business, corresponding policies and procedures are impacted by the nature of the products and services marketed and sold, as well as the “how,” “where,” and “to whom” factors.

 

Examples include:

 

Companies that market through email should have policies on CANSPAM compliance, as well as state laws that survive preemption analysis.

 

Companies that collect consumer data, should have policies and procedures focusing on the collection, security, use, third-party access and outsourcing related to such consumer data.

 

If a company markets to a particular group of clients (i.e., elderly or children), the company should have policies and procedures related to marketing to these types of groups (like COPPA and elder abuse laws).

 

If a company engages in telemarketing, it should have policies ensuring that the company complies with the FTC’s Telemarketing Sales Rule and “Do Not Call” procedures.

 

These policies and procedures should include:

 

  • Complaint and complaint response procedures

  • Marketing material creation and review policies

  • Document retention policies

  • Training, testing and documentation procedures

  • Policies for maintaining and updating your “Litigation Readiness” plan

 

3. Operational Evidence Creation

 

Understanding applicable law and developing policies and procedures are only as good as the evidence a company creates, maintains and can efficiently access to prove compliance. At the heart of Litigation Readiness is the implementation of an operational structure that contemplates what evidence is needed to prove compliance, how it would be presented in response to investigations or in litigation, what format it should take, where it should be maintained and by whom.

 

Major subjects of evidence creation could include the following:

 

  • corporate policies and procedures

  • marketing substantiation

  • employee training, testing and correction

  • customer interactions including contracts, communications, due diligence, exit interviews, complaint and complaint response

  • third-party feedback like BBB complaints, Rip-Off reports, government agency interaction and analysis and correction based on such feedback.

 

Substantiation Basics

 

Using marketing substantiation as an example, the evidence creation function may involve the following type of analysis:

 

1. What representations are expressly and impliedly made by the company?

 

2. What evidence is needed to back up the representations and does the company have it? Can the company get it and how?

 

3. Where should the substantiation evidence be maintained? Should it be the responsibility of the marketing department, legal or a compliance officer. Should it be electronic? Should evidence organization be campaign-based or claim-based?

 

Substantiation requires an on-going (day-to-day) analysis of all marketing representations on a present-to-future basis, and thus it is critical that the “owner” of marketing substantiation evidence have sufficient resources to run with or ahead of marketing claims.

 

“Spreadsheet Substantiation” or “The Substantiation Matrix”

 

Spreadsheet substantiation or a substantiation matrix are organizational concepts for correlating each representation to the information (report, data, etc.) that substantiates it. The purpose is to identify representations being made, pairing the representation to its substantiation, and allowing for ease of access to both.

 

In application, using substantiation tracking mechanisms should bring together the separate functions of designing sales and marketing materials with those of reviewing, collecting and tracking the supporting substantiation with the respective roles remaining distinct to preserve the integrity of the compliance review process.

 

By integrating the development, collection and substantiation of marketing and sales materials, marketers will be able to develop a better understanding of potential risks related to marketing, to decide whether such risks are economically legitimate, to facilitate outside counsel’s analysis of those risks and, of course, to defend against investigations and litigation claims based on marketing representations.

 

4. Training and Testing

 

Developing company policies and procedures for operating the business in compliance with relevant laws is meaningless unless employees are adequately trained and understand how to carry out their responsibilities in compliance with those policies and procedures.

 

The company’s policies and procedures should include written procedures regarding employee training, and a training process that must be documented, including relevant testing of those skills taught to employees through the training.

 

Evidence that should be created and maintained related to employee training includes:

 

  • All training materials provided to your employees

  • All testing materials intended to confirm that the knowledge provided was learned

  • Proof that the training has taken place and the learning has occurred (e.g., evidence of testing, additional training and retesting if required).

 

Perhaps the most important evidence of employee training actually involves documenting employee corrections when company policies and procedures are violated. Documenting reprimands, repeated training and termination serves as evidence that a company’s policies have meaning and purpose. More importantly, documenting employee correction evidences a company’s defense that a specific bad act was perpetrated by a rogue employee in violation of corporate policy.

 

5. Verification and Feedback

 

It is said that “perception is reality.” While evidence can prove that statement wrong, understanding how consumers, regulators and competitors perceive a company’s marketing and business operations is critical both for adjusting business operations to avoid problems and for creating and collecting evidence to combat investigations or litigation foreshadowed by complaints. Generally, businesses view consumer complaints as an annoyance; but, in truth, consumer complaints are a gift--a gift because a consumer who is complaining to a business (rather than to a regulator) gives the business a chance to respond, and a gift because consumer complaints are an indication of how a company’s operations and marketing are being perceived. If adjusting marketing or other business operations based on complaints is not warranted, then the complaints provide the business with an early opportunity to gather evidence to defend whatever challenges may be initiated based on those complaints.

 

The key to using such consumer feedback is the creation of an operational system for collecting, analyzing and addressing that feedback on an individual- and macro-level.

 

The focus of feedback collection and analysis includes:

 

  • How are you doing as a business?

  • Are you doing what you say you are doing?

  • What are consumers actually hearing from your messages?

  • Are complaints repetitive?

  • Are complaints wide-ranging?

 

Examples of sources of feedback include:

 

  • Consumer complaints/compliments

  • Internet feedback (your website, Ripoffreport.com, Consumeraffairs.com, etc.)

  • Better Business Bureau complaints

    • Number of and nature of complaints

    • Comparison to competitors in industry

  • Exit interview data (consumers, employees, etc.)

    • Ask why your customers don’t want to be customers anymore

    • Ask why your employees don’t want to be employees anymore

  • Self-conducted surveys and “secret shopper” studies

  • Informal competitor challenges/competitive advertising suggesting bad practices

  • Awards, news articles, etc.

 

Appreciate that negative feedback from any source is a gift that affords the opportunity to correct your operations, make personnel changes, implement new policies and procedures, collect defensive evidence and take other steps necessary to respond to a problem before it develops into a bigger problem.... and develop evidence on everything that is done.

 

Conclusion

 

The Hardest Part is Getting Started!

 

The Next Hardest Part is Staying Current!

 

The Key is finding the right people to commit, implement and maintain Litigation Readiness

 

  • Requires a specific, delegated representative of the company who has complete access to all departments, including Legal, Marketing, Operations, Compliance and Training.

 

  • Requires a single-minded focus to stay current on:

 

  • What the company is doing

  • What the company says it is doing

  • How the company trains it employees

  • How customers and others view the company’s performance.