Under Construction - December 2016

Snell & Wilmer

Letter from the Editor

Welcome to the winter 2016 edition of our Under Construction newsletter. We hope your year has been good to your family, your company and you as we wrap up these remaining few weeks of 2016.

A recent hot topic with businesses that operate with unions is the question of whether or not you need to provide your financial statements to the union. For many years, the law of collective bargaining was well established that employers were not required to provide financial statements to the unions that represented their employees, unless the employers claimed inability to pay the unions’ economic demands. The NLRB is currently departing from this principle however and our first article will address this issue.

A recent Utah Court of Appeals decision has shed additional light on the uphill battle a party faces in trying to overturn an arbitration award. Our second article takes a look at this case and how Utah courts continue to follow its long-standing public policy favoring arbitration. The next article will discuss another recent Court of Appeals case, this time in Colorado, that decided the dispute regarding shortened repose periods for construction defect claims against subcontractors. We then provide you with an article that takes a look at two recent federal court decisions where subcontractors were permitted to pursue payment bond claims against the surety even though they had not exhausted their contractual dispute resolution procedures with the general contractor. The next article provides a 2016 case law summary from Nevada covering cases involving unconditional lien waivers, retention and that NDOT is not a “design professional” in nonresidential construction cases. Finally, we end with a rather thorough article regarding numerous California construction laws that will take effect in 2017.

We hope you will find these articles informative and enlightening on these very important subjects. Please let us know if you want us to address a specific construction issue in a future newsletter. We hope you have a fun, busy, merry and safe holiday season!

Jim Sienicki

Do You Have to Provide Your Financial Statements to the Union?

by Gerard Morales

For many years, the law of collective bargaining was well established that employers were not required to provide financial information or financial statements to the unions that represented their employees, unless the employers claimed inability to pay the unions’ economic demands. Under this principle, claims of competitive disadvantage were considered different from claims of inability to pay.[1]

The current NLRB is departing from this principle and, in the process, the distinction between “inability to pay” and “competitive disadvantage” is being blurred.

In a recent case, the NLRB emphasized that the concepts of “competitive disadvantage” and “inability to pay” “are neither mutually exclusive nor separated by a sharp dividing line.”[2] The Board announced that, going forward, when confronting cases involving employers’ refusals to provide the unions with financial information and statements, the NLRB will look, not only to the statements made by the employers during bargaining, but also “to the entire factual picture” surrounding the employer refusal.

Accordingly, under this development, assertions that the employer needs a “competitive edge” and/or claims of unprofitability under certain economic terms (either existing under a current contract or demanded by the unions in collective bargaining) or that external financing sources are no longer willing to provide lines of credit to fund economic loses are likely to be equated with claims of inability to pay.

In essence, the current NLRB has given notice that, in most cases, such statements by employers during collective bargaining would result in NLRB decisions requiring employers to provide unions with substantiating financial information and statements, even when poverty or inability to pay (referred by the current NLRB as “magic words”) was never claimed.

Understandably, employers are reluctant to turn over non-public financial information and statements to unions that often have collective bargaining agreements with the employers’ competitors. In order to avoid getting embroiled in disputes over the obligation to provide non-public financial information and statements to unions, employers need to recognize this change in the law of collective bargaining and be particularly cautious when making economic proposals or formulating responses to union bargaining demands.


[1] Nielsen Lithographing Co., 305 NLRB 697, affd. sub nom. GCIU Local 508 v. NLRB, 977 F. 2d 1168 (7th Cir. 1992) [back]

[2] Wayron, LLC. 364 NLRB No. 60 (August 2, 2016) [back]

Vacating An Arbitration Award In Utah—Good Luck

by Parker A. Allred

The Utah Court of Appeals recently shed more light on the uphill battle a party faces in trying to overturn an arbitration award. In Denison Mines (USA) Corporation v. KGL Associates, Inc., 2016 UT App 171, decided earlier this year, a party tried to vacate an arbitration award by arguing the arbitrator had exceeded his scope of authority under the Utah Uniform Arbitration Act.

Initially, this case arose out of a breach of construction contract issue. In 2009, Denison contracted with KGL regarding a construction project in Blanding, Utah for nearly $5,063,000. Before the project was complete, KGL abandoned it and unilaterally terminated the contract because Denison refused to issue additional change orders KGL proposed. The parties agreed to submit their dispute to binding arbitration via an arbitration agreement. The agreement provided, in part, that the arbitrator would “have until December 31, 2013, to render his interim award, in the form of a brief written, reasoned award, not to exceed 5 pages in length” and that:

[t]he Arbitrator shall decide which party is the prevailing party... and shall, consistent therewith, award arbitrator’s fees, costs and expenses, reasonable attorney’s fees and costs to the prevailing party. Proof of attorney’s fees and other costs recoverable by the prevailing party shall follow the Arbitrator’s interim award on the merits.... The final award shall be issued no later than 30 days after the submission of proof of attorney’s fees and costs, but not later than February 28, 2014.

Once the arbitration hearing concluded, the arbitrator informed the parties that he would need more than five pages to provide a “reasoned award” because of the scope of the case. Neither party objected and both agreed to extend the deadline for the interim award until January 11, 2014. On January 11, 2014, the arbitrator issued a 19-page interim award finding KGL had mismanaged the work, abandoned the project and materially breached the contract. As a result, the arbitrator awarded Denison $3,989,654 in damages subject to Denison submitting “verified statements based on generally accepted accounting principles to confirm those amounts [the arbitrator] tentatively allowed” and to “confirm[] that the costs in the records total said amounts and that they do not arise from other causes.” On January 30, 2014, KGL objected to the interim award arguing the arbitrator lacked the authority to reopen the hearing or to request additional evidence. On February 28, 2014, the arbitrator issued his final award, which had the same findings and amounts as those included in the interim award. The final award also noted that he had “reconsidered the record,” and that it was “sufficient in and of itself” without additional supporting documentation. Denison then filed a motion in the district court to confirm the final award, which it did. KGL appealed.

On appeal, the Utah Court of Appeals had to determine whether the arbitrator had exceeded his authority based on 1) the interim award’s timeliness; and 2) his reconsidering the record evidence. Under Utah law, the Utah Uniform Arbitration Act governs. The standard for reviewing arbitration proceedings is highly deferential to the arbitrator and it is well-settled law that an arbitrator’s award generally will not be disturbed unless there is a showing of unfairness, partiality or infringing on a party’s rights. See Utah Code Ann. §§ 78B–11–101 to –131. In analyzing whether an arbitrator exceeds his authority, courts consider whether an arbitrator’s award: 1) covers areas not contemplated by the arbitration agreement; or 2) lacks foundation in reason or fact. KGL argued the arbitrator exceeded his authority here by: 1) untimely issuing the interim award; and 2) reconsidering the record evidence after issuing the interim award.

KGL argued that the interim award was untimely as an award “on the merits” because the arbitrator did not directly address two change-order claims; and had requested accounting or verification of Denison’s damages. The Court responded that the arbitrator considered several issues and that while not specifically addressing each claim, the arbitrator determined that “the preponderance of the evidence does not justify any monetary award to KGL” as “KGL had not demonstrated that it was entitled to a monetary award.” Further, the arbitration agreement provided that a “brief, reasoned award” be issued not that the arbitrator needed to issue a reasoned decision in detail for each claim. The Court also rejected the arbitrator’s request for verification of damages was not “on the merits.” The Court noted that “on the merits” was neither defined under the specific arbitration agreement nor in an arbitration context under Utah law. Accordingly, the Court looked at how the term “on the merits” was understood in other contexts, and found the term to be used as a technical legal term as a matter of substance rather than procedure. Then, the Court found that the interim award had been decided on substance, and that the accounting was only requested to confirm the amount of damages, which was not prohibited under the agreement.

Finally, the Court concluded that the arbitrator’s reconsidering of the record evidence was at best a procedural irregularity or informality. Between the time the interim award was issued, until the final award was issued, no changes were made. Therefore, the Court held that any reconsideration of the record evidence had no practical effect on the ultimate fairness or impartiality of the arbitration proceedings. This case is another clear example demonstrating the long-standing public policy in Utah favoring arbitration. Absent a clear showing of impartiality or wrongdoing, Utah courts will be highly deferential to the Utah Uniform Arbitration Act—if the Court can find reasonable grounds to enforce an arbitration award, it will.

Colorado Court of Appeals Affirms Shortened Repose Period for Construction Defect Claims Against Subcontractors

by Scott C. Sandberg

Colorado construction defect statute of repose, C.R.S. § 13-80-104, imposes the following deadline for filing claims against construction professionals: “in no case shall such an action be brought more than six years after the substantial completion of the improvement to the real property.” For years litigants have made competing arguments as to the date of “substantial completion” for purposes of claims against subcontractors: general contractors and owners argued that “substantial completion” occurred upon the issuance of the final certificate of occupancy on the project; subcontractors argued that “substantial completion” occurred upon completion of the subcontractor’s discrete scope of work on the project.

In Sierra Pacific Industries v. Bradbury, the Colorado Court of Appeals settled the dispute by ruling that “a subcontractor has substantially completed its role in the improvement at issue when it finishes working on the improvement.” In other words, the six-year repose period for suing subcontractors begins running when the subcontractor finishes its work on the project, even if the project is not complete until long after that date. The deadline for review of the Sierra Pacific holding by the Colorado Supreme Court has passed, meaning this holding will apply for the foreseeable future.

On one hand, Sierra Pacific benefits subcontractors by providing a shorter repose period and more clarity as to when the period begins running. On the other hand, Sierra Pacific creates gaps between the deadline to sue subcontractors and the deadline to sue general contractors, and creates differences regarding the deadline for each of the subcontractors, depending on when that subcontractor’s work was complete.

Federal Courts Rule Subcontractor Claimants Under Statutory Payment Bonds Need Not Exhaust Contractual Dispute Resolution Procedures to Recover Against Surety

by Jason Ebe

In two recent federal court decisions, subcontractors were permitted to pursue payment bond claims even though they had not exhausted contractual dispute resolution procedures.

In Tusco, Inc. v. Clark Construction Group, LLC, 2016 WL 4269078 (D. Md. August 15, 2016), the subcontractor sued the prime contractor and payment bond surety for payment for change order work on a federal construction project. Among other typical subcontract flow-down provisions, the prime contractor required the subcontractor to abide by the prime contract dispute resolution procedures. When the subcontractor was not paid, it made a claim on the payment bond, and then sued the prime contractor and the surety. Separate from its analysis of the subcontract’s conditional payment clause, the district court evaluated the surety’s defenses, including that the subcontractor’s bond claim should be stayed pending exhaustion of the contractual dispute resolution procedures.

Specifically, the surety argued that allowing the subcontractor to proceed would lead to inefficiency, duplication of effort and possibly anomalous results. In response, the subcontractor argued that to the extent the contract provisions required the subcontractor to wait an indefinite period prior to suing on the bond they would contravene the purpose of the enabling bond statute, the federal Miller Act. The subcontractor further agreed that the Miller Act enables subcontractors to collect on payment bonds after they have completed their work, especially in the face of attempts by sureties to delay litigation. The court, noting that the subcontract had already been waiting almost two years to be paid for its change order work, agreed with the subcontractor’s argument, finding that the Miller Act gives a subcontractor the right to sue a payment bond’s surety based on the passage of time, not on the payment from the government to the prime contractor. The court was not overly troubled by the surety’s concern of inconsistent results, finding that the prime contractor bears that risk by attempting to transfer risk of nonpayment through a conditional payment clause in the subcontract.

Similarly, in Strittmatter Metro, LLC v. Fidelity and Deposit Company of Maryland, 2016 WL 5108021 (D.D.C. September 20, 2016), a subcontractor sued on a payment bond to recover in excess of $1.2 million for unpaid work on a high school. The sureties moved to dismiss or stay the lawsuit because the subcontractor had not exhausted the prime contract dispute resolution procedures that flowed down to the subcontractor. In analyzing the District of Columbia’s Little Miller Act (similar to other state Little Miller Acts, modeled on the federal Miller Act), the court found that under the D.C. Little Miller Act the subcontractor could proceed. The court noted that the subcontractor lacked control over the prime contractor’s efforts at recovery made on its behalf, and that the requirement that the subcontractor await completion of the contract dispute resolution efforts was counter to the express purpose of the Act to provide a prompt remedy to an aggrieved subcontractor. The court observed that if the subcontractor had waited for the completion of the contract dispute resolution efforts, the subcontractor may have lost the right to pursue the bond claim under the Act’s one-year statute of limitations period.

In light of these recent decisions, subcontractors may wish to continue to endeavor to comply with contractual dispute resolution procedures when practical to do so. However, when the subcontractor also has bond rights, consideration should be given to proceeding timely against the surety even if those contractual dispute resolution procedures have not been exhausted. Untimely subcontractor claims may be summarily adjudicated in favor of the surety. If the clock is ticking and the contractual dispute resolution procedures are dragging out, don’t give up hope. Instead, knowledgeable construction counsel may be able to assist in evaluating the options.

Nevada’s 2016 Case Law Summary

by Alexandria Layton and Robin E. Perkins

Unconditional Waivers Found Conditional When Lienholder Doesn’t Get Paid

In Cashman Equipment Co. v. West Edna Assoc., 132 Nev. Adv. Op. 69, 380 P.3d 844 (Sept. 29, 2016), the Nevada Supreme Court considered whether an unconditional waiver and release is truly unconditional under Nevada’s mechanics lien law, NRS 108.221 through 108.246. These statutes state that an unconditional waiver and release is unenforceable when given in exchange for a check that is ultimately declined for insufficient funds. In considering these particular provisions, the Court noted that the mechanics lien laws are remedial in nature because “contractors are generally in a vulnerable position” by extending credit and investing time, labor, and materials into a project before receiving payment. Id. at 848, citing Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 124 Nev. 1102, 1116, 197 P.3d 1032, 1041 (2008). The plaintiff Cashman Equipment provided Nevada statutory unconditional waiver and release forms to defendant West Edna on a project to construct Las Vegas City Hall. But West Edna’s checks to Cashman Equipment bounced. Accordingly, Cashman Equipment recorded mechanics liens against the project and sued to enforce the liens. The Nevada Supreme Court reversed the lower court’s decision and held that even though Cashman Equipment executed an unconditional waiver, it was unenforceable because the condition that the lien claimant receives actual payment was not met. Thus, whether unconditional or not, releases are always conditional in Nevada when the lien claimant has not been paid.

Clarification of a “Design Professional” in Nonresidential Construction Cases

In Nevada Dep’t. of Transp. v. Eighth Jud. Dist. of Nevada et al., 132 Nev. Ad. Op. 10, 368 P.3d 385 (Feb. 25, 2016), the Nevada Supreme Court considered whether the Nevada Department of Transportation (NDOT) is a “design professional” under NRS 11.2565(a), in order to determine whether the requirements of NRS 11.258 applied to this action against NDOT. NRS 11.258 requires an attorney affidavit to accompany an expert report in “an action involving nonresidential construction.” NRS 11.2565(a) defines an action involving “nonresidential construction” as one that “is commenced against a design professional.” NRS 11.2565(2)(b) defines “design professional” as a “person who holds a professional license or certificate . . .” The Nevada Supreme Court affirmed the district court’s decision and determined that a governmental agency is not a “person” within the definition of “design professional,” even though NDOT’s employees hold professional engineering licenses and primarily engage in professional engineering. Accordingly, when bringing a nonresidential construction action against NDOT or other governmental agencies, an attorney affidavit is not required to accompany the expert report.

SB254 Reduces Maximum Amount of Retention to Five Percent

While we reported on this substantial change last year, as a reminder, effective January 1, 2016, Nevada reduced the maximum amount of retention that may be withheld from contractors and subcontractors in private works construction payments to five percent. SB254 is effective for all contracts entered into on or after January 1, 2016. It is important to note that the new maximum rate applies to projects for all subcontracts entered into after January 1, 2016, even if the general or higher-tiered contractors signed agreements before January 1, 2016. Thus, even if the general or higher tier contracts agreed to a retention rate higher than five percent, the five percent retention will be imposed.

New California Construction Laws for 2017

by Michael J. Baker and Mark D. Johnson

The California Legislature has enacted a variety of new laws impacting the construction industry with most of them effective January 1, 2017. The most significant of these newly enacted laws are described in this article.

  1. New Public Works Claims Resolution Procedure. AB 626

This bill adds new section 9204 to the Public Contract Code. This section creates a new claims resolution procedure for public works construction contracts entered into on or after January 1, 2017 with all state and local agencies except the High-Speed Rail Authority, and the Departments of Corrections and Rehabilitation, General Services, Military, Transportation, Parks and Recreation, and Water Resources. This new section expires December 31, 2019 unless it is renewed.

This new law is designed to expedite resolution of contractor’s claims and provides a process to help resolve them. “Claim” means a demand by a contractor for: (A) a time extension, including relief from damages or penalties for delay; (B) payment of money or damages arising from work done by the contractor for which payment is not otherwise expressly provided; and/or (C) payment of an amount that is disputed. Upon receipt of a Claim, unless extended by mutual agreement, the public entity has 45 days to investigate it and provide a written response. Any payment due on any undisputed portion of the Claim must be made within 60 days of the public entity’s response to the Claim.

Contractors disputing a Claim decision may request an informal settlement conference which the public entity is required to schedule within 30 days of the request. If the Claim is not resolved at this conference, the contractor may request mediation. The contractor and the public entity must select the mediator within 10 days from the mediation request. However, the section does not state a time limit by which the mediation must be held. If the mediation is unsuccessful, the parties are allowed to arbitrate or litigate the Claim in accordance with the terms of the underlying contract.

  1. New Means to Establish Substantial Compliance with Licensing Law. AB 1793

Under Business and Professions Code (B&P) section 7031 as currently enacted, a person employing the services of a contractor that is not duly licensed at all times during a project may sue to recover all compensation paid to the contractor. In this circumstance, the contractor must refund all monies paid to it for the project unless the contractor can establish substantial compliance under the terms of B&P section 7031(e). Currently to establish substantial compliance, the contractor must demonstrate that it had been: (1) duly licensed prior to performance of the project, (2) acted reasonably and in good faith to maintain proper licensure, (3) did not know or should not reasonably have known that it was not duly licensed and (4) acted promptly and in good faith to reinstate its license upon learning it was invalid.

This new law expands a contractor’s ability to demonstrate substantial compliance under B&P section 7031(e) by removing the condition that the contractor did not know or should not have reasonably have known that it was unlicensed during performance of the contract.

  1. Common Interest Development Construction Defect Dispute Procedures Extended. AB 1963

As currently enacted, the Davis-Stirling Common Interest Development Act requires a homeowners’ association of a common interest development to engage in certain dispute resolution procedures before filing a lawsuit against a builder, developer or general contractor regarding a claim for defects in the design or construction of the common interest development. Currently, according to its terms, the Act expires on January 1, 2017. This bill amended Civil Code Section 6000 to extend the Act until July 1, 2024.

Currently, the Contractor’s State License Board (CSLB) is required to make available to the public the date, nature and disposition of all citations and legal actions against licensees. Existing law limits the disclosure of citations to a specified time period. This new law amends B&P section 7124.6 to require the CSLB to disclose the citation from the date of issuance and for five years after the date of compliance and to disclose the citation, for the period of the citation or other disciplinary action, on the license record of any other entity’s license identified as a qualifier who is listed in the members of personnel of the license that was issued the citation.

  1. Contractor Citation Disclosures. SB 1209

Currently, the CSLB is required to make available to the public the date, nature and disposition of all citations and legal actions against licensees. Existing law limits the disclosure of citations to a specified time period. This new law amends B&P section 7124.6 to require the CSLB to disclose the citation from the date of issuance and for five years after the date of compliance, and to disclose the citation, for the period of the citation or other disciplinary action, on the license record of any other entity’s license identified as a qualifier who is listed in the members of personnel of the license that was issued the citation.

  1. Protection of Subsurface Installations. SB 661

This bill enacts The Dig Safe Act of 2016 which amends the Natural Gas Pipeline Safety Act of 2011. This Act prohibits operators who comply with the subsurface installation excavation marking and notification requirements of the Act from being liable for damages, replacement costs or other expenses arising from damage to the subsurface installation. It also creates the California Underground Facilities Safe Excavation Board which is authorized to develop rules and regulations for safe excavations of subsurface installations and investigate potential violations. The Act also changes some of the excavation notification and marking procedures.

  1. Authorization of Alternate Delivery Methods for Certain Water Storage Projects. AB 2551

This new law allows a surface water storage project identified in the CALFED Bay-Delta Program Record of Decision to use the following methods of project delivery, in addition to those authorized previously: construction manager at-risk, design-build or design-build-operate. In addition to skilled workforce and other requirements, this law requires contracts for projects subject to it, including subcontracts, to be awarded on a best value basis or to the lowest responsible bidder.

  1. Design-Build Authorized for All Health Care Districts. SB 957

This law amends Health and Safety Code 32132.5 to provide that any health care district in the State is authorized to utilize the design-build delivery method for the construction of any hospital; or health facility building. This law expires according to its terms on January 1, 2025.

  1. Department of Industrial Relations Now Required to Release Escrowed Funds Timely. AB 326

Existing law requires the Labor Commission to issue a simple wage and penalty assessment to a contractor or subcontractor, or both, if the Labor Commissioner determines, after investigation, that the contractor or subcontractor, or both, violated the laws regulating public works contracts, including the payment of prevailing wages. Existing law provides that there is no liability for liquidated damages if a contractor, subcontractor or surety deposits with the Department of Industrial Relations (DIR) the full amount of a civil wage and penalty assessment issued by the DIR pending administrative or judicial review. This new law requires the DIR to repay the funds deposited in escrow plus interest earned to those persons and entities within 30 days following either the conclusion of all administrative and judicial review or upon the department receiving written notice from the Labor Commissioner of a settlement or other final disposition of an assessment issued, or from the authorized representative of the awarding body of a settlement or other final disposition of a notice issued as set forth in the statute.

  1. School Boards Required to Advertise for Bids for Lease/Leaseback. AB 2316

Existing law permitted school district to enter so-called “lease/leaseback” arrangements without advertising for bids. This law amends Education Code section 17400 by deleting the language that provides that the governing board of a school district is not required to advertise for bids pursuant to this section. The law now requires that the school district advertise and that an award is to be based on a competitive solicitation process through the submission of a proposal providing the best value, as defined, to the school district. The law also requires the governing board of the school district to adopt and publish required procedures and guidelines for evaluating the qualifications of proposers. Finally, this amendment to existing law also provides for payment of costs, but not profit, to contractors who perform work on a project a court later finds not in compliance with the former law.

  1. Department of Transportation Capital Projects Program Expands to Include Operation of Highways and Bridges. AB 2289

Existing law requires the Department of Transportation to provide a state highway operation protection program for the expenditure of transportation funds for major capital improvements that are necessary to preserve and protect the state highway system and that include capital projects relative to maintenance, safety and rehabilitation of state highways and bridges that do not add a new traffic lane to the system. This new bill adds to the program capital projects relative to the operation of those state highways and bridges.

  1. University of California: Best Value Construction Contracting Pilot Program. SB 1214

This law extends the provisions of a pilot program regarding use of best value construction contracting for the University of California until January 1, 2018 and repeals reporting requirements in existing law. The law modifies the definition of the term “university” to mean all locations of the University of California.

  1. Prevailing Wage Per DM Rates Now to Include Certain Union Fees. SB 954

Existing law requires the director of Industrial Relations to determine the general prevailing rate of per diem wages for work of a similar character in the locality in which the public work is to be performed, and the general prevailing rate of per diem wages for holiday and overtime work. Existing law now excludes from per diem wages, if the payments are not made pursuant to a collective-bargaining agreement to which employers are obligated, employer payments for other purposes similar to certain apprenticeship or other training programs, worker protection and assistance programs or committees established under the federal Labor Management Cooperation Act of 1978, and payments for industry advancement and collective-bargaining agreements’ administrative fees as outlined in the statute. This new law amends current statutory law to require per diem wages to include industry advancement and collective bargaining agreement administrative fees if the payments are made pursuant to a collective-bargaining agreement to which the employer is obligated.

  1. Apprentices Now Entitled to Prevailing Wage for Pre-Employment Activities. AB 1926

Existing law requires that apprentices be paid prevailing wages on public works projects for work in which the apprentice is registered. This new law amends Labor Code Section 1777.5 to require that apprentices be paid prevailing wages for any type or form of work, including travel time, of pre-employment activities, such as filling out an application or undergoing testing, training or an examination, or other pre-employment process as a condition of employment when a contractor requests that an apprentice be dispatched to work on a public works project. The apprentice need not be paid for undergoing a drug or alcohol test if he or she fails the test.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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